CIPAA 2012, Contract Law and You

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My views on the law of contract, with emphasis on Construction Industry & Payment Adjudication Act 2012 Malaysia I am

a lawyer who, as a jour neyman who has been an entrepreneur, IT Project Manager and Marketing Evangelist, believes

that CIPAA 2012 has the potential to benefit the construction industry in Malaysia as a whole.

CIPAA 2012, Contract Law And You

THURSDAY, NOVEMBER 21, 2013

Posted by Jonathan Rozario at 2:44 AM No comments:

What Is The Difference Between Adjudication, Mediation, Arbitration andLitigation?

Litigation is the civil action initiated in courts and the outcome is decided by the Judge. It

is typically complicated and involves high value matters and are brought befor e a Judge

who draws on the depths of available legal knowledge and precedents, with the

assistance of opposing lawyers, to make a decision within the rigid legal procedural

structure. It is therefore easy to see why litigation is costly and of considerable length.

ADR was introduced to enable parties in a dispute to enlist a third party

(mediator/adjudicator/arbitrator) to decide in a faster period and free (or freer) from the

legal confines that is associated with litigation, to lower costs.

Here's an overview comparison of ADR

MEDIATION

very informal

high confidentiality

lower cost than arbitration

shortest period - may conclude within 1 -2 days

ADJUDICATION

less formal than arbitration, rules of evidence do not apply

Adjudicator controls content and outcome of proceeding (if any)

lower cost than arbitration

shorter than arbitration - in CIPAA 2012, Adjudicator has to decide within 45

days

decision is interim as it may be appealed or stayed or overturned by arbitral

award or Court

monetary remedies only

ARBITRATION

rules of evidence do not apply but procedural rules applicable

remedies must be legal capable of being performed

may take years to conclude

costs may be higher than litigation because of thoroughness and expediency

Litigation v Alternative Dispute Resolution

Recommend this on G oogle

MONDAY, JULY 15, 2013

When Will CIPAA 2012 Come into Effect?

The construction industry in Malaysia awaits with bated breath and wondering when will

the Minister sign the statute into effect.

It is my humble opinion that the Government needs to protect itself from the possibility of

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Posted by Jonathan Rozario at 8:25 PM No comments:

dealing with a lorry load of payment claims arriving at the doors of its various ministries

and agencies once the Construction Industry Payment & Adjudication Act 2012 ("CIPAA

2012") comes into effect. It is envisaged that the exemption card may be played by the

Government, albeit selectively initially, to minimize the claims arising from payment

disputes of the construction projects - ongoing or completed, pursuant to s. 40 of CIPAA

2012.

The potential "stop work" or "go slow" as a consequence of adjudication decisions being

enforced by unpaid parties for ongoing Government initiated projects weighs in heavily.

The impact of such actions maybe too crippling for the Government to deal with unless it

already has in placed legal personnel trained to deal with the appeal process to avoid

enforcement. Or else the Government must ready bags full of funds to fork out to deal

with unfavorable adjudication decisions to avoid enforcement.

With so much on the Government's plate, is it any wonder why no one seems to know

when CIPAA 2012 will come into effect?


SUNDAY, MAY 5, 2013

Pay Now, Argue Later and CIPAA 2012

The Kuala Lumpur Regional Centre of Arbitration (KLRCA), has often summarised the

core concept of the Construction Industry Payment & Adjudication Act 2012 (CIPAA 2012)

to be "Pay Now, Argue Later". CIPAA 2012 was introduced in Malaysia with the sole aim

of addressing the payment problem faced by sub-contractors, suppliers, agents,

professional service providers, (collectively referred to "Claimant") etc in the construction

industry, whose only remedy for payment disputes was costly and protracted litigation in

either the court or arbitration. Now, payment disputes can be brought before KLRCA

certified adjudicators for speedy and cost effective decision.

What happens when the Claimant/ himself does not come to the adjudicator with "clean

hands"? What happens if the Claimant has been accused of defective work which has

resulted in non-payment by the Respondent? Pay Now, Argue Later will have a bearing on

the payment dispute as the adjudicator will be tasked in determining the extent of work

done and decide the amount to be paid.

The nature of defective work

The nature and type of defects in construction and engineering projects can vary, and not

forgetting that the point at which the defects become apparent. On one end of the scale

minor defects can easily be corrected before the building or plant is handed over to the

employer, while at the other extreme major or significant defects may occur long after theoriginal work has been completed and require extensive remedial works to fix.

Some of the defects can arise because the work was not carried out in a 'good and

workmanlike manner' in accordance with good practice or a particular design, or because

the wrong materials have been used – matters which would usually be the responsibility

of the building contractor and its supply chain.

Alternatively a particular design is not working in the manner that it should as the designer

could be at fault.

In the frequently used design and build scenario, the contractor would normally haveprimary liability for both types of failure – although it may have consequential claims

against its designers and supply chain.

On one view identifying a defect should be easy: something has usually not been

Defective Work In Construction Projects

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provided in the manner that it should have been, the foundations of a building could crack

and subside, the air-conditioning units fail or the roof leak. However, in considering

'defects' as a matter of principle, work may be defective even if it has been carried out

with all due skill and care but it fails to meet a particular specification.

For example, brickwork may be erected correctly but the wrong type or colour of brick

could have been used in breach of planning permission.

Potentially difficult arguments can arise where work has been carried out incorrectly by

the contractor but the architect or engineer's design is also at fault. In these situations,

the contractor may deny liability on the basis that even though the work was carried out

defectively, it did not cause the damage complained of. An employer will not be as

concerned as the contractor and architect to get to the bottom of exactly who is at fault

for that as long as it can claim against one or both of the parties and both still exist.

It is often important to distinguish between patent and latent defects. A patent defect is

one that is detectable either at or before apparent practical completion or during

the defects liability period. In the past, the courts have held that patent defects must be

apparent on inspection but need not necessarily have been seen by the people carrying

out that inspection. By contract, a latent defect is one which has been concealed in the

works and may not become apparent for many years.

Typical contractual provisions

The standard form construction contracts contain provisions dealing with the treatment of

defective work during the course of construction, at completion and during the defects

liability or rectification period. By way of illustration, the contract form may provide that the

employer may issue instructions requiring the opening up for inspection of any work

covered up or tests of materials or goods or executed work. The cost of opening up or

testing is added to the contract sum, unless the inspection shows that the materials,

goods, or work are not in accordance with the contract - the contractor then bears those

costs.

The question of defects often arises in the context of practical completion (PC), and

whether or not completion can be said to have occurred even though minor defects exist.

In the absence of any definition, guidelines have been developed from case law which

broadly state that:

· at the date of practical completion the work should be complete and

free from patent defects;

· PC will be achieved notwithstanding the presence of latent defects,

because such defects are by definition not apparent;

· any defects which are not apparent at PC which do become evident

during the defects liability period may be addressed in that period;· discretion usually exists to certify PC when minor work remains to be

carried out, although it is possible to insist on completion of all snagging items

before PC.

Rights and remedies

An issue which often arises in the context of construction projects is whether the

contractor has a 'right to return' to the site to remedy defects. However, there is no such

right unless one is specifically conferred upon the contractor by the defects liability

provisions or otherwise in the contract. Where there is no express right for the contractor

to return to the site to attend to remedial works, or the relevant period has passed, an

employer is entitled to employ others to rectify defects. However, where a third party is

appointed and that is thought to be unreasonable in the circumstances of the case then

the employer may be criticised for failing to mitigate its loss.

The standard forms use different terminology for the defects rectification period, including


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'rectification period', 'maintenance period' and 'defects correction period'. The nature and

scope of such periods depend on the mechanism adopted in the particular contract, and

they are typically seen as applying to the whole of the works, the relevant part or section.

The length of the period will be negotiated by the parties and the nature of the works to be

undertaken.

In circumstances where defective work is present, several legal remedies may exist.

Starting with remedies in contract, where defective work is present as a consequence of

a breach of contract then a claiming party is entitled to be put into the position it would

have been if the work had been correctly carried out. This is achieved by a monetary

award. The claiming party's losses may be assessed on the basis of:

· the reasonable cost of repair of the defect work;

· the difference in value or loss of amenity of the relevant work.

In strict legal terms the date for assessment of the loss is when the defect is noticed, but

when considering the cost of repair the date of assessment is usually taken as when it is

reasonable in the circumstances to undertake the relevant works. A party seeking to bring

an action for breach of contract in relation to defective works has six years to do so if the

contract is executed under hand (signed by a single, authorised representative) or 12

years if the contract is executed by deed. Those periods run from the date of the breach

of contract. In the case of patent defects this should be obvious, as it is the date when the

defective work is carried out, but for latent defects the date of cause in action is usually

taken as being the date on which PC is certified or given. Similar considerations would

arise in relation to allegations of defective design.

Betterment

Where repair works result in a better or newer building, a deduction in damages will not

usually be made if the claiming party had no reasonable choice but to undertake the

works in that way. However, if a party chooses to rebuild to a higher standard than was

strictly necessary it may only be entitled to recover the cost of those works less a credit

for the betterment element of it. While each case will turn on its own facts, if works are

said to be unnecessarily expensive the test to be applied is whether the claiming party

acted reasonably in proceeding in that way. If not, it may struggle to recover the additional

costs.

Pure Economic Loss

Defects in buildings can also pose significant problems for subsequent owners who take

on responsibility for a building without having procured the relevant work. This is because

there would be no claim in contract, unless separate rights or a warranty had been

conferred on that new owner. If this situation arises and the subsequent owner has no

remedy in contract it raises the question over whether the owner can recover its costs

and losses in any other way, for example in tort. The general rule is that damage to a

building which is attributable to a defect in the structure of that building is not recoverable

– such damage is known as 'pure economic loss' as the only loss sustained is the fact

that the new owner has paid too much for the property.

In 2011 the Court of Appeal clarified that, ordinarily, contractors will not owe duties not to

cause pure economic loss. Therefore they will not owe such duties to subsequent

owners.

Limited exceptions may apply if the new owner is able to show that the contractor had

assumed responsibility for that loss through the provision of skilled advice or services or

at least some design responsibility, and that the owner had relied on that advice or

services or design. Such situations have been held to arise, for example, where a

specialist subcontractor provides services to the contractor who employed it and where a

civil engineer provided design services. However, such situations are complicated and

the preferable route would always be to ensure that any new owner had the appropriate


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contractual protection to try and guard against its losses.

Set off, abatement and withholding

Defective work also raises issues relating to certain 'self help' remedies, including

common law set off or abatement and equitable set off.

Common law set off or abatement: A summary of the legal principles :-

· in a contract for labour and materials where performance has been

defective the employer is entitled to maintain a defence of abatement;

· the measure of the abatement is the amount by which the product of

the contractor's endeavours has been diminished in value as a result of the

defective performance;

· depending on the facts, this difference may be determined by

comparing the market value of what has been constructed with what ought to

have been built, or by reference to the cost of remedial works (but not the cost

of the remedial works themselves);

· the measure of abatement can never exceed the sum which would

otherwise be due to the contractor as payment;

· abatement is not available as a defence to a claim in respect of

professional services;

· claims for delay, disruption or damage caused to anything other than

that which the contractor has constructed cannot feature in a defence of

abatement.

Equitable set-off

This is permitted where a party has a cross-claim which it would be unjust not to take into

account. This is a wide test and will cover any cross-claim 'closely connected' with the

claim being made.

The issues surrounding set off and abatement lead us to the restrictions on those rights

under CIPAA 2012. The Act provides that a party to a construction contract may not

withhold payment after the final due date. Period. Unlike similar statute in the UK which

provides that a party may not withhold payment after it becomes due unless it gives an

effective notice of its intention to withhold payment including its grounds for doing so to

the other party. This is to stop contractors abusing their position to wrongfully withhold

sums due to subcontractors who typically have no quick or cheap means to challenge the

withholding.

The "Pay Now, Argue Later" principle of CIPAA 2012 may result in prolonged litigation.

The losing party of the adjudication decision will seek to appeal the decision in court and

stay the execution of the decision. This will certainly defeat the noble aim of CIPAA 2012

to resolve payment disputes quickly and cost effectively.

Practical issues

As a starting point, it is worth thinking about how defects and completion issues should

be addressed at procurement stage. Whether something is defective will often depend

not so much on whether it is completed competently from a workmanship perspective but

on the precise standard and specification to be met. Similarly, if specific tests are to be

passed these will need to be provided for contractually, and consideration given to

whether general or liquidated damages should apply in the event of failure. The precise

standard and level of completion required for PC is something which can often cause

arguments, so careful consideration should be given to whether the completion

requirements are clear and what risks they may hold.

It goes without saying that those passing their obligations down a supply chain should

seek the same assumption of responsibility in relation to defects.


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Turning to the execution phase of the contract, the practical issues tend to focus around

evidence and notices. Defects are most likely to be picked up on site if there is regular

monitoring and testing. It will be a commercial judgement for employers and contractors

as to how much they wish to spend monitoring and testing the works, but what is crucially

important is that if defects are identified that are likely to have implications for the project

then comprehensive records will need to be taken. Similarly, if it is intended to reduce a

payment or advance a claim as a result of a defect, then consideration should very rapidly

be given to the basis of the claim. It is also not uncommon for issues to arise as to

whether an employer waived or agreed to allow a defect to remain. Again, evidence of

agreement or waiver should be obtained.

Post completion, if a defect occurs within a defects liability period under a contract then in

all probability the employer will be entitled to require the contractor to correct the defect. In

some forms this is the case even if it is not clear that the defect is the contractor's

responsibility, although the contractor will be entitled to payment if it is proved the defect

is not one for which is it responsible.

Clearly, early consideration should be given to the contractual procedures and relevant

notices. Even if the defects liability period has ended the contractor will in the vast

majority of cases remain liable in damages.

If you are an end user who did not employ the contractor or design team then you will

want to consider whether you have the benefit of any assignment of the relevant building

contract or professional appointments, or alternatively whether you have collateral

warranties or third party rights.

YONG MOK HIN v. UNITED MALAY STATES SUGAR INDUSTRIES

LTD

[1964] 1 LNS 230

DW3, a civil and structural engineer, who inspected the work at the end of the same

year also testified about the defective work as enumerated in para. 7 of thestatement of defence. The plaintiff sought to argue that the architect had supervised

the work and had issued the certificate Exh. P2, had signed in the plaintiff's pass

book, and lastly the defendant company had by their letter stated that the work was

satisfactory. In my judgment such certificate or letter only represents the approximate

value of the work done or materials used. It is not conclusive on the parties as an

expression of satisfaction with the quality of the work or materials. That is subject to

readjustment upon the issue of the final certificate. Having considered the evidence,

I am satisfied that the work was defective and was due to bad workmanship.

The defendant company opted to accept repudiation and sue for damages for

incomplete and defective work. The law with regard to the measure of damages is

adequately stated at p. 442 of the 9th Edn. of Hudson on "Building and Engineering

Contracts".

... the direct measure of damage will be the difference between the

reasonable cost to the employer of repairing the defects or completing the

work, together with any sums paid by or due from him under the contract, and

the sums which would have been payable by him under the contract if it had

been properly carried out. (Where the former does not exceed the latter, only

nominal damages would be recoverable). Such damages are clearly

recoverable within the first branch of the in Hadley v. Baxendale [1854] 9 Ex

341 as likely to arise in the usual course of things from the breach".

The editor cited several authorities and I think it would be sufficient if I only cite the

case of Hirt v. Hahn [1876] 61 Missouri 496.

B agreed to erect a house for the plaintiff according to plans by a certain day.

The defendants were B's sureties. After partly completing, B ceased work,


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and the plaintiff, after giving notice to the sureties, entered and completed

and sued the sureties. Held, that the measure of damage was what it cost the

plaintiff to complete the house substantially as it was originally intended, and

in a reasonable manner, less any amount that would have been due and

payable to B by the plaintiff had B completed the house at the time agreed by

the terms of his contract".

That is an American case but the principle enunciated was approved by the Court of

Appeal in Mertens v. Home Freeholds Co [1921] 2 KB 526 at p. 535 where LordSterndale said:

It is true that that is an American case. Though I cannot put my finger on them

for the moment I feel satisfied that there are English cases which fix the same

measure of damages. At any rate for the purpose of this case it is sufficient

to say we all consider that the proper measures of damages for the breach of

a building contract such as this".

However, the cost of completion means the cost of completing the contract work, but

not different work. Thus in Milwaukee City v. Shailer [1898] 84 Fed Rep 106 another

American case, Shailer contracted to construct a tunnel for the city. The contract

provided that in case of default, the city should be entitled to complete the work at

Shailer's expense. On Shailer's default the city constructed a tunnel which was

essentially different in plan and cost of construction from that contemplated by the

contract. It was held that the city was not entitled to recover damages from Shailer.

Mr McDonald, a quantity surveyor, testified that a total sum of $377,221.92 would be

the cost of remedying defective work and completing the project from where the

plaintiff had left it. He based his valuation on the current and appropriate building

rates for this quality of work pertaining to this part of Malaysia. It must be borne in

mind that the original contract price was $187,500, and the figure quoted by DW6

would therefore include the cost for the variation and remedying defective work. Thecost of putting right defective work, he stated, was $21,095.75. Therefore,

arithmetically, $168,720 would be the cost of the extra work. In this connection the

cost of extra work must be considered in the light of all the surrounding

circumstances. Thus an employer may have deliberately chosen a small-time

contractor with limited resources of capital, plant and labour to do the work in the

hope of getting a cheaper job. The plaintiff is a class 'E' PWD contractor with a

ceiling of $50,000. As no fixed amount was agreed upon in respect of extra work,

and considering that work was to be done by a contractor of the same class as the

plaintiff, and in view of the principle enunciated in Milwaukee City v. Shailer, supra, I

would consider a sum of $126,540 (750f $168,720) as reasonable. In the

circumstances, the amount that would cost the defendant company to complete the

work and remedy defects would be $335,135.75.

As against that amount must be deducted the contract price as varied that would

represent the costs which the plaintiff would have expended on the whole project as

varied. I assess that figure in the following manner:

Original contract price $187,500

Extra work 74,000

;$261,500.00 ($74,000 is made up of $24,000, the cost of alteration from

zinc walls to 9" brick walls; $40,000 for a third store; and $10,000 for labour

and miscellaneous expenses). From the amount of $261,500 must be

deducted the sum of $36,000 as representing the fifth progress payment.

Therefore the amount which would be due to the plaintiff would be $225,500.

The measure of damages would be the difference between the reasonable costs of


8/18



Posted by Jonathan Rozario at 7:19 PM No comments:

completing the work as varied and the amount that would have been due to the

plaintiff had he completed the work as varied, and that is $109,635.75.


SATURDAY, MARCH 30, 2013


Can You Refuse To Pay Contractors Costs?

This question can be answered by looking at the express

provisions in the contract.

Unless there is an express provision in the contract that

states the contractor will only be paid when the client pays

“pay when paid”), the client should still pay on time, or the

provisions of the late payment legislation will apply.

It has been the norm for construction contracts to contain

such provision, which means that even if the contractor

completes the job, payment is still subject to the client

himself getting paid.

Such pay when paid clause will become void when the

Construction Industry & Payment Adjudication Act 2012

(“CIPPA 2012”) comes into force, and a default payment

clause will be activated and it may be reasonable to imply

payment terms of 30 days or sooner.

If there is no provision for payment terms in the contract,then arguably payment may be due on presentation of theinvoice. Should the invoice not be paid promptly, thenCIPAA 2012 provides a quick and less expensive methodfor contractors to recover payment.

What are the terms of the contract?


FRIDAY, FEBRUARY 8, 2013

Do I Need a Lawyer To Handle Payment Disputes In CIPAA 2012?

Lets face it. The professional relationship with a lawyer is best described by U2... "I can't

live, with or without you".

Like it or not, if a payment dispute in a construction contract is brought to adjudication

within the ambit of Construction Industry Payment & Adjudication Act 2012 ("CIPAA

2012"), the services of lawyers will be inevitable, ultimately.

CIPAA 2012 enables an unpaid party to make a "Payment Claim" for work done or goods

/ services supplied under a written contract for construction works carried out wholly or

partly in Malaysia. If the claim remains unpaid by the non-paying party, the unpaid party

can then proceed to submit an "Adjudication Claim" lodged with the KLRCA, and thereon

proceed with the appointment of the adjudicator, whose job will be to come up with the

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adjudication decision which has to be delivered within 45 days of either the Adjudication

Response or Adjudication Reply, whichever is the later.

A two-tier involvement can be anticipated for lawyers in payment disputes brought for

adjudication in CIPAA 2012, i.e. - pre-adjudication decision and post-adjudication

decision.

CIPAA 2012 does not impose any specific format on parties for filing of various

documents to bring or to defend a claim to be adjudicated by an adjudicator certified by

Kuala Lumpur Regional Centre For Arbitration ("KLRCA") at this moment. This is quite

unlike an action in the Courts whereby the format and filing of cause papers is determined

by various statutes and therefore requires the services of a lawyer if one is to avoid the

pitfalls of Do-It-Yourself litigation.

The scope of involvement of lawyers at initial stages of the Payment Claim and Payment

Response may not be required by parties, especially where the disputed amount is not

substantial, and the payment dispute does not involve complicated facts and issues. The

preparation of documents required for "Payment Claim" by the unpaid party and

"Payment Response" by the non-paying party, and subsequently the "Adjudication Claim"

and "Adjudication Response" can very well be handled by non-lawyers. It can be ably be

dealt with by persons within the company with sufficient legal exposure, but with detailedpersonal knowledge as to the details of the dispute at hand. The key contribution a lawyer

can provide at this stage is to provide compilation expertise to prepare relevant

submissions in what may turn out to be invaluable when the adjudication decision is

disputed in Court or arbitration.

If a lawyer is involved in the preparation of all documents and communications between

parties and the appointed adjudicator prior to the adjudication decision, he / she will be

able to provide valuable input in such preparation, including being able to keep an eye

open to look out for issues which may result in improperly procured adjudication decision,

such as denial of natural justice and bias, fraud, bribery, etc which can then be used to

contest the adjudication decision and get it set aside by the Courts.

The growth and penetration of CIPAA 2012 will largely depend on KLRCA, as theadjudication authority, who can be expected to introduce rules, policies and guidelines to

regulate adjudication claims, including standardization of the format of cause papers and

its administration. As this evolves, the level of expertise required to adhere to such rules

will follow naturally and resulting in it becoming a specialized area for claim consultants

which is likely to consist mostly of lawyers, or at the very least those who are legally

trained.

Both the winning and the aggrieved party can be expected to turn to the Courts., either to

enforce the adjudication decision or to set aside and/or stay the execution of the same.

So then, it follows that both parties will have to engage services of their lawyer as such

applications are highly technical in nature with specific formats and procedures to adhere

to.

The options available to the aggrieved party includes:

1. apply to the High Court to set aside the adjudication decision on grounds that it was

improperly procured through :

a. fraud or bribery;

b. there has been a denial of natural justice;

c. the adjudicator has not acted independently or impartiality; or

d. the adjudicator has acted in access of his jurisdiction.

2. apply to the High Court for a stay of the adjudication decision.

If a lawyer had been involved during the pre-adjudication decision, then he / she would

have been able to identify the grounds on which the adjudication decision may be set

aside.

One thing is certain. The way documents are filed and kept will be of utmost importance

A Two-Tier Involvement

Pre-Adjudication Decision.

Post-Adjudication Decision


10/18



Posted by Jonathan Rozario at 4:00 PM 1 comment:

in enabling the payment dispute to progress smoothly. Whether lawyers are involved or

not, the success or failure in such payment disputes will rest on parties' ability to compile

its documents quickly, given the short time frames accorded to the parties for filing of

relevant cause papers under CIPAA 2012.


SUNDAY, JANUARY 13, 2013

How To Enforce An Adjudication Decision In CIPAA 2012 Malaysia

The success of Construction Industry Payment & Adjudication Act 2012 ("CIPAA 2012")

as a legal mechanism for unpaid parties in a construction contract for works carried out

wholly or partly in Malaysia to settle payment disputes will be largely determined by the

"bite" which enables the successful party to enforce the adjudication decision.

If the unpaid party / claimant obtains an adjudication decision in his favour, s.28 CIPAA

2012 empowers him to enforce it by applying to the High Court for an order as if it were a

judgment or order of the High Court. This means that the whole gamut of enforcement via

the Court including writ of seizure and sale, winding-up proceeding, bankruptcy, debtor

summons and likely garnishee order, is available by the winning unpaid party to enforce

the decision obtained at adjudication.

The key proviso is that the adjudication decision has not been stayed or set aside or

overruled by arbitration or the Court. However,as enforcement through the mechanisms

of the Court will be costly and maybe time consuming, it is envisaged that it will be a

disincentive in cases where the claim amount does not justify it.

1. suspend the performance or reduce the rate of progress of performance in theconstruction contract in which the payment dispute arose;

2. obtain payment of the adjudicated decision direct from the principal of the construction

contract.

If the proper procedure of providing written notice of intention to do so to the other party if

the adjudicated amount is not paid within 14 calendar days from the date of receipt of the

notice. S.29 of CIPAA 2012 affords protection to the party who exercises his right to

suspend or "go-slow" without having to repudiate or terminate the on-going construction

contract, and also being able to be entitled to recover any loss and expenses incurred as

a result of the suspension or "go-slow" from the Respondent of the adjudicated decision.

The other option open to the unpaid party of the adjudication decision, pursuant to s.30

CIPAA 2012 is to attempt to to get the principal of the party against whom the adjudication

decision is made.

This will only be effective if money is due or payable by the principal to the party against

Respondent of the said decision, at the time the request was received from the unpaid

party.

If the said Respondent or losing party fails to show proof of payment to the unpaid party,

the principal shall pay the adjudicated amount to the party who obtained the adjudicationdecision in his favour.

Within CIPAA 2012, the principal referred to does not necessarily mean the ultimate

Employer / Developer / Owner in the construction contract between the unpaid party

Claimant and the non-paying party Respondent. The "principal" means the party one

Enforcement Through the High Court of Malaysia

Other than enforcement of the adjudication decision through the Court,

CIPAA 2012 offers a rather more effective method of enforcing the said

decision, i.e:

1. Suspend or Slow Work Performance

2. Direct Payment From Principal

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level above the said Respondent and in many cases may turn out to be the Main

Contractor or even a sub-contractor as the construction industry in Malaysia tends to

have a long chain in the construction process consisting of a chain of sub contractors,

manpower providers, tools and machinery providers, outsourced maintenance

contractors and services providers, consultancy services, hardware and building material

suppliers, etc.

It is anticipated after CIPAA 2012 comes into force, many principal / employers consisting

owners, developers, main contractors and possibly large sub-contractors in the

construction industry in Malaysia will be surprised to one day receive a notice demanding

payment for the adjudicated amount for work done or goods supplied by a sub-contractor

or supplier 2 levels below the principal. Are you ready Malaysia?


MONDAY, DECEMBER 10, 2012

Construction Industry & Payment Adjudication Act 2012 - An Overview

The construction industry in Malaysia is headed for a seismic upheaval in 2013, if industry

players embrace the new payment regime imposed by CIPAA 2012. The Act will regulate

payment disputes in the construction industry for construction works undertaken wholly or

partly in Malaysia for buildings, telecommunication, oil & gas, infrastructure, maintenance,

exterior and interior design, and shall be extended to consultancy services such as

architectural services, engineering, surveyors, planning & feasibility studies, project

management, and procurement. The scope of CIPAA 2012 is extensive and extends to

"services" and "supply".

Payment disputes are the concern of this Act and can be brought to an adjudicator

certified by Kuala Lumpur Regional Centre of Arbitration (KLRCA) as an alternative

form of dispute resolution. It is believed to be cheaper and faster than litigation through the

Courts. This Act gives wide powers to the adjudicator with a view to enable a decision tobe made within 45 days upon the close of pleadings. As such, the underlying approach

for justice of this Act is "Pay Now, Argue Later ". This rough justice approach lays in stark

contrast to the fine justice approach adopted by the Courts.

The adjudicator's decision is final and can be enforced in court, unless set aside or

stayed or brought to arbitration or appealed in court. Other avenues opened to the winning

claimant if payment not settled by losing respondent within the time stipulated in the

decision, is to slow work rate, stop work (without having to repudiate the contract) or

make a payment claim directly to the employer (a level directly above the

respondent/losing party in the construction chain).

This Act is expected to shake up the payment malaise currently afflicting the construction

industry and related consultancy service providers. Conditional payment terms such as"Back-to-back " and "financial draw down" payment terms is prohibited and shall be

deemed to be void pursuant to s. 35 CIPAA 2012. Payment shall be based on actual work

done or goods delivered, if contract terms does not contain specific clauses governing

payment or by operation of s.35 deemed void, reference to s.36 CIPAA 2012 shall be

necessary. S. 36 provides for "the right to progress payment at a value calculated by

reference" to the contract price, variation order or a reasonable cost of carrying remedial

work or dimunition of value. Reference to prescribed fees by relevant regulatory board

shall be made in the event there is no agreed or stipulated fees or price in the contract.

The frequency of progress payment is monthly for construction work or construction

consultancy services, and in cases of supply of construction materials, equipment or

workers, payment shall be upon delivery of such. The due date for payment is 30calendar days from the receipt of the invoice.

This means that employers (not necessarily limited to developers / main contractors only,

and may include the sub-contractor who purchases material or rents equipment) can no

longer make reference to conditional payment terms in the contract or purchase order or

CIPAA 2012 - Are you ready Malaysia?

An Overview

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12/18



Posted by Jonathan Rozario at 6:11 AM 1 comment:

work order to put off paying for work done or goods/materials, equipment or workers

supplied to delay making payment in Malaysia anymore. The impact of CIPAA 2012, I

believe, will be felt most within this scenario, which is likely to see suppliers or sub-sub

contractors bringing payment disputes to the adjudicator upon after the invoice becoming

due and unpaid.

However, work done outside the scope of the contract, i.e quantum meruit, is not

expected to be covered by this Act, unless a variation order in writing can be proved.

So ready or not Malaysia, this Act will come into force upon execution by the Minister of

Works.


MONDAY, DECEMBER 3, 2012


Can The Main Contractor Impose Liquidated Damages Fixed Under TheMain Contract On A Subcontractor Who Finishes Late?

Presumption : Subcontractor has contractual obligation to finish within a timescale and is

in breach of the obligation if he completes late.

Where a subcontractor is in breach he will have a liability to pay damages to the main

contractor.

The injured party is entitled to recover any loss likely to arise in the usual course of things

from the breach, plus such other loss as was in the contemplation of the parties at the

time the contract was made and which is likely to result from the breach.

The main contractor, as injured party, is entitled to levy a claim for damages against a

subcontractor who completes late. These damages will include any liability the main

contractor has to pay liquidated damages to the employer which result from the delay.

This will apply irrespective of the value of the subcontract work.

It is open to the subcontractor to argue, if the main contract liquidated damages are

extremely high, that the sum involved was outside his contemplation at the time the

contract was entered into. To forestall this type of argument main contractors, usually

with the tender enquiry documents will set out details of the main contract (including the

sum included for liquidated damages).

Where the subcontractor is nominated and the main contract provides for an extension of

time where work is delayed by the subcontractor no claim from the employer for

liquidated damages will arise provided that the contractor has properly claimed the

extension of time.

Relevant cases:

1. Hadley v. Baxendale (1854)2. Victoria Laundry (Windsor) Ltd v. Newman Industries (1949)

3. M.J. Gleeson plc v. taylor Woodrow Construction Ltd (1989)


SUNDAY, SEPTEMBER 2, 2012

Basics of Construction Contracts In Malaysia

Construction projects typically involve several different parties – owners, designers, prime

contractors, subcontractors, architects, consultants, suppliers – with different interests . Due to themany variables, construction projects have its associated risks . Therefore, the purpose of the

construction contract is to:

(1) allocate the duties between the parties;

(2) recognize and allocate the risk to the different parties; and

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13/18



(3) reduce the uncertainty surrounding the project and allow the parties to plan for the project and

the future as best as possible.

In Malaysia, the introduction of Construction Industry Payment & Adjudication Act 2012 ("CIPAA

2012") is envisioned to regulate payment disputes which currently afflicts the construction industry.

The scope of CIPAA 2012 is expected to include the oil & gas industry, petrochemical,

telecommunication, utilities, infrastructure supply contracts, project and management, in addition to

typical building construction projects.

Construction work must be carried out wholly or partly in Malaysia, and any payment dispute arising

from a written contract may be referred to an adjudicator registered with the KL Regional Centre for

Arbitration. The approach of such process is "PAY NOW, ARGUE LATER".

Construction contracts may be verbal. However, it is recommended that construction contracts be

in writing in order to bring any payment dispute to be adjudicated within the ambit of CIPAA 2012. A

written contract presents a c lear record of the parties’ agreement, whereas and oral agreement is

subject to the parties’ recollection of the terms.

When entering into a written contract, the parties should make certain that the writing accurately

reflects the agreement between the parties. The parole evidence rule may prohibit evidence of

contract terms differing from those in the written agreement. The integration clause of a contract

also prohibits evidence of other terms or negotiations.

It must be emphasized that CIPAA 2012 only recognizes written contracts and not verbal or oral

contracts, to be adjudicated by a Kuala Lumpur Regional Centre of Arbitration (KLRCA) certified

adjudicator.

This is the typical contract with a negotiated lump sum price. This type of contract is preferred by

owners for the following reasons:

• owners can utilize a competitive bidding process

• all risks are placed on the general contractor

• the general contractor must control costs and perform efficiently

Before entering into this type of contract, the owner must have detailed plans and specifications for

the project, and the general contractor must have clear and specific instructions and scope of work.

A cost plus contract is often used in the absence of detailed plans and specifications. The general

contractor is paid for all costs incurred. The general contractor is also normally paid a fee for

overhead and profit, plus a fee for general condit ions. The owner assumes all risks of excess ive

costs . Frequently, an incentive provision is used to encourage cost savings by the general

contractor.

Similar to a cost-plus contract, but with some protection for the owner, utilizing a GMP (guaranteed

maximum price) as a cap for project. The GMP is typically adjusted with each change order, just

as a lump sum contract price is adjusted. This type of contract is amenable to the design build

situation, where the general contractor also serves as a designer. The GMP is arrived at after the

project has been completed to the design development stage.

In most contracts, the contract documents are "incorporated by reference." Contract documents

usually include plans and specifications, the “prime contract” between the owner and all prime

Is a verbal agreement enforceable?

Stipulated value or lump sum contracts?

What is a cost plus contracts with a management fee?

What is a GMP?

What are the contract documents?


14/18



contractors, including the general contractor, addenda, building codes and regulations, and

modifications to the plans and specifications after execution of the contract.

It is important for a contractor to review all contract documents incorporated by reference, as the

terms of those documents may be binding on the contractor. For instance, if a prime contract

(between the owner and a general contractor) contains an arbitration provisions, courts will typically

enforce the arbitration requirement against a subcontractor in contract with the general contractor. It

is not necessary, however, that contracts provide for adjudication before payment disputes are

brought for adjudication within CIPAA 2012.

On a smaller scale, a written contract may be referenced withi n documents used in the supply of goods and/or services,

such as work order, purchase order, invoice, delivery order, etc.

Disputes regarding scope of work are often the basis of construction claims. Scope of work is

defined as the extent of a contractor's responsibility to perform certain contract work. To determine

the scope of work, the contractor may have to look to other contract documents – plans and

specifications, contracts with others – and to industry standards (building codes, etc.)

The scope of work issues between the owner and the general contractor differ from the scope of work issues between the general contractor and subcontractors. The general contractor must be

sure that all of the scope of work is contracted to subcontractors, and that there are no overlapping

scope of work issues.

Questions regarding scope of work should be resolved in the written contract . Scope of work

references should be detailed in the contract. If detailed specifications are available, refer to the

specifications in designating scope of work.

It must be pointed out that the scope of CIPAA 2012 is limited to payment disputes.

The price in the contract will either be lump sum, unit price, or time and material. The contract

should include a definite price, or a definite method of determining price. Absent price, an otherwise

valid contract will be interpreted as requiring payment of a fair value ( quantum meruit ).

Progress payments are periodic payments constituting partial payment of the contract sum. The

contract should include a specific provision for time and method of payment and calculation of

amount.

A schedule of values should be prepared by the contractor and approved by the owner and

architect. The schedule should accurately break down the scope of work into component parts, and

assign a value to each component part.

Applications for payment should be measured against the schedule of values. The application

typically includes the amount of work in place, the cost of materials stored on site, the costs of

labor to date, less an amount for retainage and previous payments. The application is usually

certified by the architect or owner and the payment is due thereafter.

It must be noted that CIPAA 2012 prohibits conditional payment terms such as "Pay When Paid",

"Back to Back" or " Pay If Paid".

One of the greatest concerns and risks on a construction project is payment by the owner, or main

contractor or employer. Once the contract work has been fully performed, everyone wants to be,

and should be, fully paid. One of the risks of nonpayment is the owner's or main contractor's or

employer's potential inability to pay. Throughout the work chain of contractors, sub contractors,

sub-sub contractors and suppliers there is a need to agree on who bears the risk of nonpayment –

the general contractor or the subcontractor, etc

Contractors routinely try to shift the burden of nonpayment to subcontractors. "Pay when paid" and

"pay if paid" and "pay upon financial drawdown" provisions are popular and widely used. Such

conditional payment terms only serve to delay the time for payment to the subcontractor even in

situations where the contracted work has been completed and complied with.

What is the scope of work?

What is the contract sum?

What are the methods for payment of the contract sum?

Pay when paid, or pay if paid provisions


15/18




Typical pay when paid clauses provide something like:

"The total price paid to [subcontractor] shall be [contract price], no part of which shall be paid until 5

days after payment is received from owner."

or

". . . the Contractor shall pay the Subcontractor each progress payment and final payment . . .

within three working days after he receives payment from the Owner . . . ."

In Thos. J. Dyer v. Bishop International Engineering Co., the Sixth Circuit U.S. Court of Appeals

refused to enforce a pay when paid clause. In Dyer, a general contractor was not paid on a project

after the owner declared bankruptcy. The general contractor, in turn, did not pay its subcontractor

for the work it performed.

The introduction of CIPAA 2012 deems that such conditional payment are void and unenforceable.

This, I believe, is where the impact of CIPAA 2012 will be keenly felt by players in the construction

industry in Malaysia.

Typical schedule provisions

The schedule for completion of the contract work is an essential component of the contract, and a

frequent focus of construction litigation. In a perfect world, the contract will incorporate a detailed

computer generated completion schedule, with milestone dates for the essential tasks, and theschedule will be updated periodically to reflect changes in the schedule to reflect changes and

progress.

At a minimum, the prime contracts should include a date of commencement of the work,

a project duration (the time that the prime contractor agrees to reach substantial completion of its

scope of work), and a definition of substantial completion.

The date of commencement is subject to change, based on several factors. The most common

factors affecting the date of commencement influenced by the owner are owner funding, the delivery

of final plans and specifications, the availability of the building permit. Changes in the date of

commencement change the date of substantial completion.

The project duration is measure either in calendar days or working days, and is based on the

number of days that the parties predict it will need to complete the project. Project duration is

subject to lengthen based on several factors: changes directed by the owner, unforseen conditions,

force majeure, weather, contractor issues.


FRIDAY, AUGUST 24, 2012

Natural Justice As The Basis To Set Aside An Adjudication Decision -Section 15 (b) Construction Industry Payment & Adjudication Act 2012 of Malaysia

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16/18



Section 15 Construction Industry Payment & Adjudication Act 2012 of Malaysia("CIPAA

2012") provides that:-

"An aggrieved party may apply to the High Court to set aside an adjudication decision on

one or more of the following grounds:

(a) The adjudication decision was improperly procured through fraud or bribery;

(b) there has been a denial of natural justice;

(c) the adjudicator has not acted independently or impartially; or

(d) the adjudicator has acted in excess of his jurisdiction."

This post seeks to explore the concept of natural justice.

It is a term that denotes specific procedural rights in the English legal system. There are

two rules that natural justice is concerned with - the rule against bias and the right to a fair

hearing.

This basic concept of impartiality where a person is barred from deciding any case inwhich he may be, or suspected to be biased, applies to courts of law, tribunals,

arbitrators and all those having the duty to act judicially, including adjudicators.

Bias may be actual, imputed or apparent. Actual bias is established where it is actually

established that a decision-maker was prejudiced in favour of or against a party, which is

in practice, very hard to prove.

One form of imputed bias is biased on the decision-maker being a party to a suit, or

having a pecuniary or proprietary interest in the outcome of the decision. Once this fact

has been established, the bias is irrebuttable and disqualification is automatic - the

decision-maker will be barred from adjudicating the matter without the need for any

investigation into the likelihood or suspicion of bias.

In certain limited situations, bias can also be imputed when the decision-maker's interest

in the decision is not pecuniary but personal.

Apparent bias is present where a judge or other decision-maker is not party to a matter

and does not have an interest in its outcome, but through his conduct or behaviour gives

rise to a suspicion that he is not impartial.

Exceptions to the rule against bias includes Necessity and Waiver.

Necessity is where a disqualified adjudicator cannot be replaced. as no one else is

authorized to act. Waiver of the right to object, and proceedings are allowed to continue if

no objection is raised as soon as the prejudiced party has knowledge of the bias.

The effect of a finding of bias - judgment not void but voidable. This advice is not wrong in

the context of a judicial act under review, where the judgment will be held valid unless

reversed on appeal.

The aspects of a fair hearing includes:

i. Prior notice of hearing - the right to adequate notification of the date, time, place of the

hearing as well as detailed notification of the case to be met.

ii. Opportunity to be heard - the right to have a hearing and be allowed to present his own

case. However, this requirement does not necessarily mean the decision-maker has tomeet the complainant face to face.

iii. Conduct of the hearing - the adjudicator has to ask whether the person charged has a

proper opportunity to consider, challenge or contradict any evidence, and whether the

person is also fullly aware of the nature of the allegations against him.

When can an adjudication decision be set aside?

What Is Natural Justice?

1. Rule Against Bias

2. Right To A Fair Hearing (Audi Alteram Partem)

http://www.rcakl.org.my/userfiles/File/CIPAA%20Act%20746%20ENG.pdf


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iv. Right to legal representation

The adjudicator issued a decision that the defender should repay the full amount withheld

as liquidated and ascertained damages. The pursuer now raised proceedings to recover

the sums found due by the adjudicator by means of court proceedings via a motion for

summary decree. The only defence advanced was that the adjudicator's decision is

vitiated by a breach of the principles of natural justice, due to the fact that the

adjudicator had requested for to grant an extension of four days as he wished to "discuss

one point in particular with [his] appointed legal adviser". The result of the discussions

with the legal adviser was not made known to the parties, nor was either party told of the

terms of the discussions that had taken place, or to see their result. Neither party was

invited by the adjudicator to comment or make submissions upon the advice tendered,

and neither party requested any opportunity to do so.

Held :

1. It is important that confidence in the adjudication process should be maintained. For

such confidence to be maintained, it is important that adjudicators should be clearly seen

to give parties a fair opportunity to present their arguments by fulfilling the principle of audi

alteram partem.

2. The mere possibility of injustice is sufficient for a challenge to an adjudicator's decision

for the reasons set out in para 1. above. The parties do not know the content of the legal

advice obtained by the adjudicator. It could have been crucial. Indeed, because the

adjudicator asked for advice on a particular matter, it is reasonable inference that he

thought that it was important. I do not think that the possibility of injustice can be excluded.

3. I conclude that the defender has stated a relevant defence to the pursuer's claim to

enforce the adjudicator's decision. It follows that the pursuer has not satisfied the test for

summary decree, namely that the question of law that arises as to the relevancy of the

defender's averments admits of a clear and obvious answer in the pursuer's favour.

Pursuer's motion for summary decree is refused.

If an adjudicator's decision was to be challenged on account of a breach of the principles

of natural justice, the breach must be substantial and relevant.

Lord Reid - this is at least clear : no tribunal, however informal, can be entitled to reach a

decision against any person without giving to him some proper opportunity to put forward

his case.

This is a case involving a statutory tribunal that determined the valuation of wool.

Lord President Clyde - "Although quasi-judicial bodies such as this tribunal are not Courts

of law in the full sense, it has been the law of Scotland that they must conform to certain

standards of fair play, and their failure to do so entitles a Court of law to reduce their

decisions. Were it not so, such tribunals would soon fall into public disrepute, and

confidence in them would evaporate. Fair and equal opportunity afforded to all interests

before the tribunal is the fundamental basis upon which the tribunal must operate, and, in

the absence of such fair play to all, it is right and proper that a Court of law should reduce

the tribunal's decision...

The test is not 'Has an unjust result been reached?' But 'Was there an opportunity

afforded for injustice to be done?' If there was such an opportunity, the decision cannot

stand".

It was accepted that the principles of natural justice were applicable to adjudication

proceedings. It was further accepted that if an adjudicator obtains material from sources

other than the parties, including his own knowledge and experience, he must give the

parties a reasonable opportunity to comment on that material.

Summary of Cases

1. Costain Ltd v. Strathclyde Builders Ltd [2003]

2. Discain Project Services Ltd v Opecprime Development Ltd [2001]

3. Inland Revenue v Barrs [1961]

4. Barrs v British Wool Marketing Board [1957]

5. Balfour Beatty Construction Ltd v London Borough of Lambeth [2002]


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Documents

CIPAA 2012, Contract Law and You