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On 16 October 2019, the Federal Court in Jack-In-Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd [Federal Court Civil Appeal No. 02(f)-58-07/2018(B)] (“Bauer case”) ruled that the Construction Industry Payment and Adjudication Act (“CIPAA”), and the adjudication mechanism thereunder, only applies to construction contracts which were entered after 15 April 2014. This decision upholds the position taken by the Court of Appeal that CIPAA can only apply prospectively.

Brief Facts
  • The Appellant, Jack-in-Pile (M) Sdn Bhd was appointed by the Respondent, Bauer (Malaysia) Sdn Bhd as its subcontractor for the construction of 3 blocks of condominiums (“Project”), pursuant to a letter of award dated 16 March 2011 (“Letter of Award”)
  • A payment dispute arose between the parties and on 3 August 2016, the Appellant issued a payment claim to the Respondent pursuant to the adjudication process under CIPAA.
  • At the conclusion of the adjudication proceedings, the adjudicator held that the Respondent was liable to make payment to the Appellant.
  • The Appellant applied to the High Court to enforce the adjudication decision. The Respondent on the other hand, applied to the High Court to set aside the adjudication decision.
  • A core contention between the parties was Clause 11.1 of the Letter of Award, which provided that the Appellant shall only be paid within 7 days from the date the Respondent received their related progress payments from the employer – i.e: it is a “pay when paid” clause. Section 35 of CIPAA renders “pay when paid” clauses void, so the question to be determined was whether Section 35 of CIPAA applies to the Letter of Award which was entered into between the parties prior to the enactment of CIPAA.
  • The High Court allowed the Appellant’s application to enforce the adjudication decision and dismissed the Respondent’s setting aside application.  The High Court held that CIPAA applied retrospectively even to contracts entered before 15 April 2014.
  • The Respondent appealed to the Court of Appeal. The Court of Appeal allowed the appeal on, among other things, the basis that CIPAA can only apply prospectively and therefore had no applicability to contracts entered prior to the coming into force of CIPAA. The Court of Appeal therefore set aside the adjudication decision.
  • The Appellant appealed to the Federal Court.
Federal Court’s Findings

The Federal Court was asked to determine these questions of law:

  • Question 1: Whether CIPAA applies to construction contracts entered into before the coming into operation of the Act .ie: 15.4.2014?
  • Question 2: If the answer to Question 1 above is answered in the affirmative, does it follow that Section 35 of CIPAA should also apply to construction contracts entered into [before] 15.4.2014?

The Federal Court answered both questions in the negative, holding as follows:

  • CIPAA does not apply retrospectively and does not apply to construction contracts entered before 15.4.2014. Parliament did not insert a provision in CIPAA that it was to be applied retrospectively, and in the absence of such provision, the Courts cannot imply that CIPAA is to be applied retrospectively.
  • Since CIPAA does not apply retrospectively, at the time of the entering of the Letter of Award in 2011,  the “pay when paid” clause in Clause 11.1 was recognised and accepted to be valid.  As parties had been acting upon their contractual rights and taken steps in that regards, it would be grossly unfair to the Respondent if CIPAA is construed to apply retrospectively to void Clause 11.1.
  • Since the provisions of CIPAA undoubtedly affect the substantive rights of parties and such rights ought not to be violated, CIPAA can only apply prospectively. The outcome is that the entire adjudication proceedings, including the adjudication decision are rendered void, and the adjudication decision is set aside.
Key Takeaways

The Federal Court’s pronouncements in the Bauer case will have a significant impact on the construction industry, in particular those who are having payment disputes in respect of construction contracts which were entered into prior to 15 April 2014.  In the upshot, it means:

  • Payment disputes arising from construction contracts entered before 15 April 2014 cannot be resolved by the adjudication mechanism under CIPAA; and
  • “Pay when paid” clauses in construction contracts entered before 15 April 2014 remain valid and enforceable

It remains to be seen how the Federal Court decision will impact ongoing matters or even matters which have already been resolved. For example, ongoing adjudication proceedings in respect of construction contracts entered before 15 April 2014 will be dismissed or rendered void.   A question mark remains over adjudication decisions (in respect of pre-CIPAA contracts) that have already been enforced via High Court judgments, since a High Court judgment cannot be “automatically” set aside due to a new development in the law in a separate case/appeal; yet such claims may still be pending final determination in arbitration or litigation.

While the Bauer case will eventually cease to have an impact (as we will gradually be having less and less disputes involving pre-CIPAA contracts due to the passage of time), there still remains an air of uncertainty in the interim regarding ongoing payment disputes relating to such pre-CIPAA contracts.

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This article was written by Donovan Cheah. Donovan is an advocate and solicitor of the High Court of Malaya. He is a Fellow of the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and the Asian Institute of Alternative Dispute Resolution. Donovan is also registered with the Singapore International Commercial Court as a foreign lawyer. 

Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory.  Have a question? Please contact us.

 

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