CIPAA: Resolving Construction Payment Disputes Expeditiously

Introduction

The Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) came into force on 15th April 2014. CIPAA provides for a statutory adjudication process to resolve disputes in the construction industry, allowing parties an alternative to the lengthy and costly process of arbitration or litigation.

The passing of CIPAA is an attempt to overcome the regular problems encountered in construction projects such as delays in completion or the abandonment of projects due to under-payment, late payment or non-payment issues.

The statutory adjudication provided by CIPAA aims to be a quick and efficient process to resolve payment disputes between employers and contractors, as well as between contractors and sub-contractors, to allow the quick remedy of cash flow, while more substantive issues of dispute may be resolved subsequently through arbitration or litigation.

In the event a party would like to initiate adjudication under CIPAA, the consent of the other party is not required as this is a mandatory statutory process. Parties therefore, will not be able to contract out of CIPAA even when the construction agreement in question provides a different mechanism for dispute resolution such as arbitration.

Applicability of CIPAA

CIPAA applies to all construction contracts formed through written agreements, to carry out projects wholly or partly in the territory of Malaysia whether the contract is entered with the government or a private party.

The term “construction contract” includes both a construction work contract as well as a consultancy contract, therefore all disputes arising out of non-payment for works done, services rendered or materials supplied under a written construction contract would be covered by CIPAA.

On a separate note, the Asian International Arbitration Centre (“AIAC”) would also consider a construction contract to be made in writing if:

1. A contract is made in writing whether or not signed by the parties.
2. A contract is made by exchange of communications in writing.
3. A contract is evidenced in writing

However, CIPAA is not applicable to any construction contract entered into by a natural person for the construction of any building which is less than 4-storeys high and which is wholly intended for the occupation of the said person. In other words, CIPAA usually does not apply to renovation works contracted between an owner and a building contractor.

Under CIPAA, the unpaid party is only allowed to refer a ‘payment’ dispute to adjudication. Section 4 defines payment to mean "payment for work done or services rendered under the express terms of a construction contract". As such, one would not be able to refer extra-contractual claims, such as tortious claims or general damages arising from breaches of contract, to adjudication under CIPAA.

The unpaid parties are able to claim for progress payments, whatever their form and frequency of disbursement (i.e. monthly, stage payment, advance payment). It should also cover items of payment such as for varied work or changes, diminution in value, prime cost sums, preliminaries, cost adjustments, provisional sums, contingent sums, and retention sums, so long as these are expressly provided for under the construction contract in question.

Commencement of Claim under CIPAA

Under section 5 of CIPAA, the unpaid party is to serve a payment claim onto the non-paying party. The payment claim shall be in writing and contain the following:

1. The amount claimed and the due date for payment of the amount claimed.
2. Details to the cause of action in the claim.
3. Description of the work and services to which the payment relates.
4. A statement that it is made under CIPAA.

Thereafter, the non-paying party is to serve a payment response within 10 working days in accordance to section 6 of CIPAA. A Payment Response needs to set out the amount disputed, whether it is the whole amount claimed or any part thereof, as well as the reason for the dispute, failing which, the non-paying party is deemed to have disputed the entire payment claim.

The right to refer a dispute to adjudication shall only be exercised in the absence of the service of a payment response upon the expiry of the 10 working days mentioned above. The right to refer a dispute to adjudication can be exercised by both the unpaid party and the non-paying party.

When an adjudication is initiated under CIPAA, the Claimant is to serve the written notice of adjudication together with any supporting documents to the Respondent. The written notice shall contain the nature and description of the dispute and the remedy sought by the Claimant.

Parties will then have 10 working days from the service of the notice of adjudication to agree on the appointment of an Adjudicator, failing which either party may request the Director of AIAC to appoint an Adjudicator. If so requested, the Director will appoint an Adjudicator within 5 working days.

Next, a written Adjudication Claim containing the nature and description of the dispute and the remedy sought together with all supporting documents must be served within 10 working days from the receipt of the acceptance of appointment by an Adjudicator.

The Respondent shall then serve a written Adjudication Response answering the Adjudication Claim together with any supporting documents within 10 working days from the receipt of the Adjudication Claim.

The Claimant then has the right to reply to the Adjudication Response by way of a written Adjudication Reply together with any supporting documents within 5 working days from the receipt of the Adjudication Response.

The appointed Adjudicator has powers under section 25 of CIPAA to conduct the adjudication proceedings as he/she deems fit. In most cases, the Adjudicator will not allow for oral hearings.

Lastly, the adjudicator shall decide the dispute and deliver the Adjudication Decision within 45 working days from the date of receipt of the Adjudication Response or Adjudication Reply (whichever later), or from the date when the Adjudication Response ought to have been served (if no Adjudication Response was served).

Effect of Adjudication Decision

After the Adjudication Decision was pronounced by the Adjudicator, the winning party has to enforce the decision by applying to the High Court to register the same. Without the enforcement, the Adjudication Decision is not final.

Adjudication Decisions are in general binding unless:

1. It is set aside by the High Court.
2. The subject matter is settled by written agreement between parties.
3. The dispute is finally decided by arbitration or the court.

The losing the party may also apply to have the Adjudication Decision set aside under section 15 of CIPAA.

On the other hand, the winning party has the right under section 29(1) of CIPAA to suspend performance or reduce the rate of progress of performance of any construction work or construction consultancy services under a construction contract, provided that the adjudicated amount pursuant to an adjudication decision has not been paid wholly or partly after the receipt of the adjudicated decision.

If the adjudicated amount is not paid within 14 calendar days from the date of receipt of the notice, the party intending to suspend the performance or reduce the rate of progress of performance shall give a written notice of intention to suspend performance or reduce the rate of progress of performance to the other party.

Upon the expiry of 14 calendar days of the service of notice given under Section 29(2) above, the party intending to reduce the rate of progress of performance shall have the right to do so, of any construction work or construction consultancy services under a construction contract, subject to conditions to be complied with.

Disadvantages of CIPAA

However, there are several shortcomings when it comes to CIPAA. Among others, CIPAA is only confined to payment disputes in relation to construction contracts, as was mentioned above.

The Adjudication Decision made by the Adjudicator is interim in nature as is subject to arbitration and litigation.

The Adjudicator may decide on how to conduct the adjudication proceedings beyond what is set out in the Act. Parties have little room to seek oral hearings, site visits, and the like.