Construction Industry Payment & Adjudication Act (CIPAA)

CIPAA Chinese Version/中文

Introduction

STATUTORY ADJUDICATION - A BRIEF OVERVIEW IN MALAYSIA

The Construction Industry Payment and Adjudication Act 2012 (CIPAA) was recently gazetted.

The construction industry, in particular, the Construction Industry Development Board (CIDB) and Master Builders Association Malaysia (MBAM) and other related promoters have been instrumental in getting the government to enact this piece of legislation since 2003 to address the cash flow problems plagued by the industry.

The primary objective of the Act is to address cash flow problems in the construction industry.

It removes the pervasive and prevalent practice of conditional payment (pay when paid or pay if paid) and reduces payment default by establishing a cheaper and speedier system of dispute resolution in the form of adjudication.

The Act also provides for the recovery of payment upon the conclusion of the adjudication process in addition to a host of other remedies such as a right to reduce the rate of work progress or to suspend work or even to secure direct payment from the principal.

It further provides default payment terms in the absence of provisions to that effect in the construction contract.


WHAT IS STATUTORY ADJUDICATION?

Adjudication is a means of dispute resolution that allows a party (the claimant) who is owed monies under a construction contract to promptly obtain payment from the non-paying party (the respondent), based on an assessment of the merits of the claim by an appropriately qualified and independent industry expert i.e. the adjudicator.

Statutory adjudication is essentially an adjudication process prescribed by CIPAA. It is conducted privately and ensures confidentiality.

It is a mandatory and statutory process that does not require the agreement of the parties' to commence the process and prevails over any contractual agreements to the contrary between the parties.

It offers a relatively simpler, cheaper and faster process compared to arbitration and/or court proceedings by virtue of express provisions prescribed by the proposed Act itself.

The adjudicator must make a decision within forty five (45) working days from the completion of the reference by the parties to him failing which his decision is regarded as void and that he cannot recover his payment.

The decision is temporarily binding in that it can still be subjected to an arbitration or litigation in court i.e. if either or both the parties so desire. In the interim, the parties need to still comply with the adjudicator& decision and pay the disputed amount unless the decision is stayed (by application made to High Court).

WHO DOES IT AFFECT?

CIPAA applies to every "construction contract" (as defined by the Act) relating to construction work carried out wholly or partly in Malaysia. It therefore affects both local and international contracts that fall within the ambit of the Act.

CIPAA identifies the particular construction contracts which are included within its scope. Generally, these encompass construction work contracts and consultancy services contracts.

More importantly, CIPAA only applies to contracts which are made "in writing".

The Act applies equally to the Government of Malaysia as well as the Private Sector.

CIPAA is wide ranging and covers inter alia, the building industry, the oil and gas industry, the petrochemical industry, telecommunication, utilities, infrastructure, supply contracts and consultancy contracts.

CIPAA does not apply to an individual owner i.e. resident, who is building a house not more than four-storeys high which is wholly intended for his own occupation.

Statutory adjudication is compulsory in that any party to a construction contract who is neither excluded nor exempted under the Act has the right to resort to adjudication. There is no contracting out of the Act permitted so as to defeat the application of its provisions and/or the objectives of the Act.

Only payment disputes for work done and services rendered under the express terms of a construction contract may be referred and be subjected to adjudication.


FAQ on Adjudication

WHO CAN START THE ADJUDICATION?

Either party to a construction contract can start the process of adjudication provided the right to do so under the Act has accrued.

This can be done by serving a notice of adjudication on the opposing party.


HOW DO I CHOOSE AN ADJUDICATOR?

Parties are entitled to choose their own adjudicator by mutual agreement as specified by CIPAA.

If the parties are unable to so choose, a request in writing can be made to the Director of the Kuala Lumpur Regional Centre for Arbitration (KLRCA) to nominate an adjudicator.

It is important that the adjudicator selected is well qualified and experienced to deal with the particular dispute and to handle the adjudication process in a timely and cost effective manner as prescribed by the Act.


DO I NEED A LAWYER?

A party to the adjudication proceedings may represent itself or by any representative appointed by it who may be a lay practitioner or a lawyer.

A lawyer may however be necessary if there is a reference for a stay or for the enforcement of the adjudicator's decision to the High Court.


WHAT HAPPENS DURING AN ADJUDICATION?

The adjudicator is given a list of powers, duties and obligations by the CIPAA to conduct the adjudication.

The procedure as stipulated in the Act must be complied with. It is generally informal and relatively flexible being both adversarial and inquisitorial.

Generally, the adjudicator invites written submissions and evidence from both parties. There may be a short hearing or meeting where further submissions can be made, witnesses cross-examined and the adjudicator may ask questions on matters in issue. An adjudicator may also conduct a site visit if necessary. He is permitted to use his own specialist knowledge subject to the rules of natural justice in dealing with the matter in dispute.


WHAT CAN BE DONE IF PAYMENT IS NOT MADE AFTER THE ADJUDICATOR'S DECISION?

CIPAA allows, as one of the remedies, for the winning party to suspend or reduce the rate of progress of the construction work provided notice is given to the "losing" party. The former is entitled to a fair and reasonable extension of time to complete his obligations under the contract after being paid and to recover any loss and expense incurred thereby.

CIPAA further permits the "winning" party a right to request for direct payment from the principal of the party owing the monies, and the principal is required to pay the amount in question subject to the particular provisions of the Act.

More importantly, the "winning" party can also apply to the High Court to enforce the adjudicator's decision whilst the "losing" party is permitted to seek a stay of the same by application to the High Court.

CIPAA provides that the winning party can exercise any or all of the above rights or remedies concurrently.


HOW IS AN ADJUDICATOR'S DECISION ENFORCED?

Both parties to a construction contract are required to comply with an adjudicator's decision.

If one of the parties refuses to comply with the adjudicator's decision, the other party may enforce the adjudicator's decision through the courts. When enforced, the adjudicator's decision takes effect as a judgment of the court unless the opposing party obtains a "stay" from the court.


WHO PAYS FOR THE ADJUDICATION?

Both parties are required to equally share the cost of the adjudicator's fees and expenses. These fees have to be deposited with the Director of the KLRCA in advance as security.

The "loser" of the adjudication will have to pay eventually all the costs. As prescribed in CIPAA, "follow event" which simply means that the loser must pay for the legal and other related costs to the " winner" in the adjudication proceedings.

The "loser" of the adjudication must also pay for the amounts as decided by the adjudicator in regard to the payment dispute.


WHAT IS THE ROLE OF THE KUALA LUMPUR REGIONAL CENTRE FOR ARBITRATION (KLRCA)?

KLRCA is responsible, inter alia, to:
• Set the competency standard and criteria of an adjudicator. This is done by providing the relevant training courses to parties who are interested to become certified adjudicators;
• Certifying qualified adjudicators and listing them on KLRCA' s panel of adjudicators;
• Determine the standard terms of appointment of an adjudicator and fees for his services;
• Provide administrative support for the conduct of adjudication under CIPAA; and
• Undertake any other duties and functions as may be required for the efficient conduct of adjudication under this Act.

KLRCA will maintain a copy of each and every adjudication decision undertaken under CIPAA as the adjudicator is required to serve the same on the Director of KLRCA upon the conclusion of the matter referred to him.

KLRCA will also act as a stakeholder for the adjudication fees payable to the adjudicators, and for any adjudicated amount ordered by the court to be deposited with KLRCA by any party pursuant to an application for a stay.

For KLRCA to play the above role, the adjudicator will direct the parties to pay the adjudicator's fees to the Director of KLRCA as advance security.


HOW CAN I BEST PREPARE FOR ADJUDICATION?

General awareness of CIPAA is necessary.

A good system of contemporaneous record keeping is essential. It will become vital should a party intend to pursue an adjudication action or to defend a claim.

The payment terms in the construction contract must be adhered to as strictly as possible.

The absence of payment terms would automatically trigger the operation of the default provisions under CIPAA meaning, amongst others, that the fees prescribed by the relevant regulatory board under any written law will apply or if there are no prescribed fees then a fair and reasonable price would be awarded for the work and services done.

An adjudication under the Act can only commence when a "dispute" has arisen. An opportunity must be given to the other party to respond to the payment claim before an adjudication should be considered. If the other party denies the claim, disputes the claim or simply fails to respond to the claim, only then should an adjudication be triggered.



WHAT ARE THE MAIN STEPS INVOLVED IN ADJUDICATION?

The adjudication process can be summarised by the following principal steps:-

Step 1: Making the Payment Claim

The unpaid party may serve a Payment Claim on the non-paying party. The non-paying party may then respond by making payment or by serving a Payment Response on the unpaid party in reply to the claim within 10 working days. If there is a failure to respond within this time, it is deemed that the entire payment claim is disputed. Either party may then refer the dispute to adjudication.

Step 2: Initiation of Adjudication

The adjudication proceeding is initiated by the serving of a Notice of Adjudication by the Claimant on the Respondent.

Step 3: Nomination of Adjudicator

An adjudicator is thereafter nominated by the agreement of both parties in the dispute within 10 working days from the service of the notice. Upon any disagreement or if the parties so desire, a request can be made to KLRCA for the adjudicator to be nominated by the Director of the KLRCA who has 5 working days to undertake the same.

Step 4: Making of Adjudication Claim & Response

Once the adjudicator is nominated and has negotiated and accepted the terms and conditions and the relevant fees, the Claimant has to serve the Adjudication Claim on the Respondent within 10 working days upon receipt of the acceptance by the adjudicator. The Respondent has to then serve the Adjudication Response on the Claimant within 10 working days particularizing his defence and response following which the Claimant may then serve a further Adjudication Reply within 5 working days.

Step 5: The Adjudicator

The adjudicator would then start with the review of the documents submitted and the making of his decision. He may call for meetings, require interrogatories to be answered by the parties, call for clarifications and further documents, if necessary to help him with his task. In doing so, the adjudicator has to abide by the rules of natural justice and the relevant provisions of CIPAA.

Step 6: Adjudication Decision

The Adjudicator has to reach a decision, formulate it and deliver the decision not later than 45 working days from the service of the Adjudication Response or Adjudication Reply, whichever is later unless the parties agree otherwise expressly. An adjudication decision which is not made within the specified period is statutorily void. The adjudicator may also direct full payment of the fees and expenses to be deposited with the Director of KLRCA prior to the release of the adjudication decision to the parties. A copy of the decision must be provided not only to the parties but a copy must be served on the Director of KLRCA as well.

[The above information on CIPAA is provided by the Kuala Lumpur Regional Centre for Arbitration (KLRCA), the Adjudication Authority under CIPAA. Please visit the source page at www.rcakl.org.my for updates and amendments.]



There must be a 'cashflow' in the building trade. It is the very lifeblood of the enterprise.
Lord Denning, Dawnays Ltd v FG Minter [1971] 2 All ER 1389