Introduction

By nature, construction industry is a high risk industry. It has been contributed in the nation’s GDP and

employs many workers both professionals and manual labourers. These professionals include main

contractors, sub-contractors, suppliers, architects, consultants, surveyors, etc. They have a relationship with

their employers on the premise that they will get payment for their works and services. While payment as

described in Royden (M) Sdn Bhd v Syarikat Pembenaan Yeoh Tiong Lay Sdn Bhd is the value of any work,

materials or goods comprised in the contract. There are 2 types of payment, i.e. Interim Payment and Final

Payment. Both payments are issued by the architect, superintending officer, engineer or contract

administrator.

However, since the construction projects are huge in the amount, the employers may find difficulties in

paying such amount. Therefore, the employers may find some ways to delay the payment or even to find

reasons not to pay. These may occur when they are in a poor financial situation, fail to implement good

governance in their business or because their attitude/local culture. These payment defaults, i.e. delayed

payment, non-payment and conditional payment (‘pay when paid’ and ‘pay if paid’) have caused a domino

effect which affects all players in the industry. CIDB reported that it appears 100% consensus that payment

Contractor’s Remedies for Late or Non-Payment

Seng Hansen

Master Student of Construction Contract Management UTM

Email: hansen_zinck@yahoo.co.id

effect which affects all players in the industry. CIDB reported that it appears 100% consensus that payment

and related issues are considered to be a problem in the construction industry. In short, problems on

payment range from: failure to pay, refusal to pay, setting-off from sums certified or due, allegations of

under and over certifications and failure to certify, delayed payments, and associated problems of getting

paid even with certificates in hand including significant delays in enforcing rights to payment1.

One Malaysia famous case was between Perwik Sdn Bhd v Lee Yen Kee (M) Sdn Bhd. In this case, the main

contractor made a payment claim which was due and outstanding. The employer denied being indebted to

the contractor in the sum claimed. The employer contended that the related payments had been made

direct to the sub-contractors. The employer also alleged that he was entitled to set-off the amount due for

defective works and damages for late completion. The court held that in respect of the main contractor’s

claim for progressive payment, the employer had no right to withhold payment without any express

provisions in the contract. Under the contract, all payments were to be made to the main contractor.

Furthermore, the employer had no defence to the main contractor’s claim. The counterclaim was not

plausible and was frivolous.

Enforcement of Payment

There are some methods which can be done by the contractors to get their right. Commonly, both in

Indonesia and Malaysia, payment dispute will be settled in arbitration proceedings. However, in Malaysia

case, if the dispute cannot be settled by way of arbitration or if the unsuccessful party challenges the

award, then he can bring this dispute to the Court – an uncommon way of construction dispute settlement

in Indonesia. Below are some remedies that can be done by the contractor to enforce the rightful payment.

1

1. Noushad Ali Naseem, 2004. CIDB Working Group (WG) Report – Payment. Kuala Lumpur: CIDB Malaysia

1. Summary Judgment

Summary judgment can be defined as a procedure where the court decides a claim or particular issue

against claimant or defendant without trial2. In this kind of procedure, the contractor issues the summons

having sworn to the belief that there is no defence to his claim. This remedy will save time and cost for trial

and hearing process. The procedures of application for summary judgment is mandatory and the party who

apply must strictly complied with the procedure governed stated in Order 14 of HCR, Order 26A of SCR or

other alternative such as Order 81, Order 73 and Order 183. Unfortunately, none of the Malaysia standard

form of contract expressly provides the application for summary judgment as one of the remedy available in

the case of late or non-payment. Therefore, if the contractor has received the rightful payment certificate

from the architect or superintending officer, and the employer refuses to pay without clear reasons, then

the contractor may go to the court and ask enforcement by way of summary judgment under Common Law

principle.

In the case of Sri Hartamas Development Sdn Bhd v MBF Finance Bhd [1992] 1 MLJ 313, the Supreme Court

held that summary judgement via litigation may be obtained for unpaid payment claims. Another famous

case was the case of Pembenaan Leow Tuck Chui & Sons Sdn Bhd v Dr Leela’s Medical Centre Sdn Bhd [1974]

2 MLJ 94. In this case, the contractor (appellant) sued the employer and sought summary judgment under

Order 14 of HCR alleging that the employer was under an obligation to promptly pay the contractor the sum

written in the certificate issued by the architect. The court held allowing the appeal.

Under the common law as applied in Malaysia, the contractor may ask summary judgment under Order 14

of HCR 1980 on the ground that the employer has no defence to the claim except as to the amount of

damages claimed. On the other hand, the employer can take a counter-action by submitting an application

for a stay of the court proceedings. If this happens, it may cause the contractor more expense and delay of

enforcement.

2. Set-Off Provisions2. Set-Off Provisions

According to Oxford Law Dictionary, set-off has 2 meanings; 1) a monetary cross-claim that is also a defence

to the claim made in the action by the claimant, 2) the deduction of monies owed against sums due to be

paid. Many commercial contracts contain express terms prohibiting set-offs.

Usually occurs in construction industry where the employer refuses to make payment on the basis of a set-

off for damages arising from defective work and overvaluation. In simple, a set-off can be considered as a

defence to a claim by way of a counter-claim. Under PAM 2006 clause 30.4, the employer shall be entitled to

set-off all cost incurred and loss and expense where it is expressly provided under Clauses 2.4, 4.4, 5.1,

6.5(e), 6.7, 14.4, 15.3(b) 15.3(c), 15.4, 15.5, 19.5, and 20.A.3. No set-off under this clause may be made

unless:

30.4(a) the architect or Quantity Surveyor (on the behalf of the employer) has submitted to the contractor

complete details of their assessment of such set-off; and

30.4(b) the employer or the architect on his behalf has given the contractor a written notice delivered by

hand or by registered post, specifying his intention to set-off the amount and the grounds on which such set-

off is made. Unless expressly stated elsewhere, such written notice shall be given not later than twenty eight

(28) days before any set-off is deducted from any payment by the employer.

Moreover, the contractor may dispute the amount of set-off under the same clause (30.4): If the Contractor

after the receipt of the written notice from the Employer or the Architect on his behalf, dispute the amount

of set-off, the Contractor shall within twenty one (21) Days of receipt of such notice, send to the Employer

delivered by hand or registered post a statement setting out the reasons and particulars for such

disagreement. If the parties unable to agree on the amount of set-off within a further twenty one (21) Days

after the receipt of the contractor’s response, either party may refer the dispute to adjudication under

Clause 34.1. The Employer shall not be entitled to exercise any set-off unless the amount has been agreed by

the Contractor or the adjudicator has issued his decision.2

2. L.B Curzon, 2004. Dictionary of Law. 2nd Edition. International Law Book Services

3. Siti Suhana Judi and Rosli Abdul Rashid, 2010. Contractor’s Right of Action For Late or Non-Payment by the Employer

From the above explanation, we can conclude that: 1) the employer may set-off the certificate only under

some circumstances, 2) the contractor may dispute the amount of set-off, 3) if both parties unable to agree

the amount of set-off, they can refer to adjudication, and 4) if there is still no agreement towards the

amount or no decision issued by the adjudicator, the employer shall not be entitled to exercise any set-off.

Therefore, the employer cannot simply refuse to pay the amount stated in the certificate by alleging that

parts of the works to which the certificate related are in defect.

In the case of BMC Construction Sdn Bhd v Dataran Rentas Sdn Bhd [2001], the court rejected the

employer’s notion by bona fide to set-off payment because of the alleged defects of work by the contractor

was seemed failed to be established. Because of no provision of set-off available in the agreement, the

employer cannot claim his right against the contractor. In the case of Ribaru Bina Sdn Bhd v Bakti Kausar

Development Sdn Bhd & Anor (2007) 2 MLJ 221, the Court of Appeal held that the employer cannot simply

to set-off against the contractor in respect of the work done when there was no contractual provision

available in the contract. The employer attempts to discover all sorts of excuses to avoid paying the

contractor what is due to it for work done strongly supports an interference that the employer lack of bona

fide. While in the case of L’Grande Development Sdn Bhd v Bukit Cerakah Development Sdn Bhd (2007) 4

MLJ 518, the employer and the contractor had two similar contracts with different phase. The court held

that the employer was obliged to pay the contractor according to amount certified in interim certificate

unless the amount cancelled as agreed by both parties. The employer cannot set-off with cross claims for

damages in respect of another project because each contract bears different project and different SO in

which he is liable to any certification for losses and damages by suffered by the contractor.

Provision to set-off also provided in Limitation Act 1953 as stated in section 6 which describes that any

claim filed by the employer to set-off payment to the contractor must be brought before the expiration of

six years from the date on which the cause of action accrued.

3. Section 218 of Companies Act 1965 (Winding Up)3. Section 218 of Companies Act 1965 (Winding Up)

According to Oxford Law Dictionary, winding up is a procedure by which a company can be dissolved. It may

be instigated by members or creditors of the company (voluntary winding up), or by order of the court

(compulsory winding up). In both cases the process involves the appointment of a liquidator to assume

control of the company from its directors. He collects the assets, pays debts, and distributes any surplus to

company members in accordance with their rights.

It is possible for the contractor to force the employer to pay the rightful amount of payment by filing a

winding up petition under the Companies Act 1965. It starts from section 217 (1) (b) that allows any

creditor of the company to file a winding up petition. It means the contractor can file a winding up petition

of the employer’s company. However, there are some grounds and circumstances in which a company can

be wound up. Section 218 (1) (e) expressly states that the contractor may file petition if the employer’s

company is unable to pay its debts. Section 218 (2) describes the definition of inability to pay debts.

In the case of BMC Construction Sdn Bhd v Dataran Rentas Sdn Bhd [2001] 1 MLJ 356, the employer was

unable to pay its debts. The contractor then asked for winding up petition. In opposing the petition, the

employer alleged that it had a cross-claim or set-off against the petitioner for loss and damage of defective

works. However, the judge made a decision by ordering the respondent be wound up.

4. Construction Industry Payment and Adjudication Act (CIPAA)

CIPAA perhaps is the best method to settle any dispute related to payment in construction industry in

Malaysia. The aims of CIPAA which will be approved soon by the government are to remove the practice of

payment default (delayed payment, non-payment and conditional payment), to establish a cheaper,

speedier and binding mechanism of dispute resolution. Below is the procedure of payment dispute

settlement based on CIPAA mechanism. 3

The key point of CIPAA is to maintain the contractor’s cash flow so that he will not go into insolvency. The

terms used in this mechanism are ‘rough justice is better than no justice’ and ‘pay first, argue later’.

Therefore, based on CIPAA the contractor may ask the payment from the employer as the amount stated in

the certificate. If there is any dispute, i.e. the employer does not agree with the amount or want to set-off

the certificate, both parties should go to KLRCA as the third party appointed by the government. During the

adjudication proceedings, the employer should pay the stated amount first to the contractor, and the

contractor can continue the work. The dispute itself will then be determined by the adjudicator.

Conclusion

In the event of payment default, there are many effects that the contractor should bear, i.e: creates cashIn the event of payment default, there are many effects that the contractor should bear, i.e: creates cash

flow problems, creates stress on the contractor, creates financial hardship, leads to insolvency, leads to

abandonment of the project, and create negative social impacts. By understanding these effects, both

contractor and employer should have a strong and mutual relationship to achieve their same objective –

which is to complete the project within a specified budget, time and quality. However, if there is any

payment default, the contractor can seek remedies and rights such as apply for summary judgment, apply

for winding up petition, refer back to set-off provision, go to adjudication based on CIPAA. The other

remedies which can be seek include determination of the contract, claim for interests, slowing down the

work, release the payment bond (if any), and suspend the work.

References

Statutes referred to:

Companies Act 1965 (Act 125). s. 218.

Limitation Act 1953. s. 6.

Books referred to:

Hafiz bin Saad, 2008. Revising Contract Sum: The Employer Right to Set-Off Payment. MSc. Universiti

Teknologi Malaysia.

Jonathan Law and Elizabeth A. M., 2009. A Dictionary of Law, 7th Edition. Oxford: Oxford University Press.

Tony, Ang SS., 2006. Payment Issues – The Present Dilemmas of Malaysian Construction Industry. MSc.

Universiti Teknologi Malaysia.

Articles/Presentations referred to:

Fong, Lim C., 2005. The Malaysian Construction Industry – The Present Dilemmas of Unpaid Contractors.

Master Builders.

Siti Suhana Judi and Rosli Abdul Rashid, 2010. Contractor’s Right of Action For Late or Non-Payment by the

Employer. Journal of Surveying, Construction & Property.4