Issue Affecting the Construction Industry

A main issue affecting the construction industry has always been the problem of delayed as well as non-payment. Partly because of the complexity of construction work and partly because of financing issues, there are bound to be disputes relating to non-payment. Remedies such as suspension of work and direct payment are difficult to be properly and lawfully exercised unless there are expressed provisions in the contract and the disputes are resolved by an independent third party.

What is needed is an avenue where dispute resolution methods can be quickly affected and are affordable. More importantly, the disputes must be resolved quickly as and when they happen. Existing dispute resolution mechanisms in the construction industry such as arbitration and litigation are time-consuming and are often expensive.

The arbitration or litigation process normally takes two to five years or longer to be resolved and costs tens or hundreds of thousands of ringgit which will further eat into contractors’ already thin margins. In fact, arbitration and litigation often take a long time because a detailed meticulous fact-finding process is required since the decisions are final.

Another issue is that most standard terms in construction contracts stipulate that arbitration can only commence after the project is completed or terminated. This may be due to the fact that prolonged arbitration or litigation during the construction stage can be very disruptive.

As a result, cash flow of contractors will be affected and this will inevitably affect the progress of construction. Consequently, innocent third-parties, such as the purchasers, are often the victims of delayed or abandoned projects.

One recommendation to overcome this issue was for the creation of a Malaysian Construction Industry Payment and Adjudication Act (CIPAA). The Act would provide some relief if contractors are assured or given some security and remedies in the key issue of payment. Without any security of payment and quick justice through adjudication, the unpaid party either suffers in silence or is put out of business at the end of the current dispute resolution through arbitration or litigation.

The existing related statutory laws such as the Contracts Act 1950, Sale of Goods Act 1957 and Arbitration Act 2005 can be applied generally and are not efficient enough to deal with current problems. It must be noted that there are already similar acts in Britain, Australia, New Zealand and Singapore. These include:

• Building and Construction Industry Security of Payment Act 2002 (Victoria, Australia)
• Construction Contracts Act 2002 (New Zealand)
• Building and Construction Industry Security of Payment Act 2004 (Singapore)

(2008, December 9). Proposed Act to Protect Contractors. The Star Online.

2.0 INTRODUCTION

In Malaysia, given the industry experiences on payment problem and taking heed of experiences of other countries, the industry working group (WG 10) led by the Institution of Surveyors Malaysia (ISM) is currently working earnestly to formulate the Malaysian Construction Industry Payment and Adjudication Act (CIPAA). The particularly small sized sub-contractors are definitely benefited from payment provisions in the proposed CIPAA, but need to enhance their knowledge in order to improve their awareness of the benefits of the Act. It is found that on its relevancy, the adjudicator shall be equipped enough with the knowledge on the issues to become a good and reliable adjudicator, as well as sub-contractors will need to enhance their knowledge on the issues of payment in order to be successful in benefitting the proposed CIPAA. However, as long as the CIPAA remains in proposal, the sub-contractors have to bear with the knowledge of the current structure of payment mechanisms in the standard forms of contract, which are payment upon certification, direct payment from the employer, and contingent or conditional payment.

In responding to the shortcomings of payment regime and as an improvement to dispute resolution, there is a new wave and a new interest in statutory adjudication as the primary means of dealing with construction disputes in Malaysia. Following the steps of the precedent countries, where the right to refer a dispute arising from a construction contract is governed by statute in jurisdictions, Malaysia construction industry is also introducing statutory adjudication.

Nevertheless, adjudication is still a concept whose potential has not been explored to its fullest within Malaysia. In the Malaysian construction industry, the common methods of settling construction disputes are through litigation and arbitration. Unfortunately, there is widespread dissatisfaction in the industry with the both mechanisms. Litigation was expensive and slow. Arbitration has been labelled as “litigation in the private sphere”, “a pale imitation of high court procedure” and “timeless”. The perceived shortcomings of litigation and arbitration, with their concomitant rise in costs, delays, and adversarial relationships, therefore have encouraged the rapid growth of alternative dispute resolution process.

3.0 CONSTRUCTION LNDUSTRY PAYMENT AND ADJUDICATION ACT (CIPAA) AND WHY ADJUDICATION IS THE VIABLE TOOL FOR DISPUTE RESOTUTION TO RESOLVE PAYMENT

The Construction Industry Development Board Malaysia (CIDB) is currently working together with the construction industry to develop the proposed Construction Industry Payment and Adjudication Act (CIPAA). This CIDB – Construction Industry collaboration started in 2003 following the recommendations of a construction industry working group on payment and related matters, work group (WG) 10. WG10 is one of the ten working groups established by the Construction Industry Presidents’ and CEOs’ Roundtable Discussion to make recommendations on improving the construction industry. Similar initiatives were made in many other commonwealth countries earlier like United Kingdom, Australia, New Zealand and Singapore.

One of the recommendations of WG10 is for the enactment of a Malaysian Construction Industry Payment and Adjudication Act (CIPAA). This recommendation has been translated into one of the recommendations in the Malaysian Construction Industry Master Plan (CIMP) 2006-2015. Now, over a few years from the first initiative and after much efforts and follow-up deliberations, a preliminary draft bill on the proposed CIPAA is ready. The draft is currently being further refined. ( Construction Industry Development Board Malaysia. (December 2008). A Report on The Proposal for A Malaysian Construction Industry Payment and Adjudication Act, CIPAA. Kuala Lumpur. Ms Sariah Abdul Karib.)

Cash flow is critical to the construction industry. Even Lord Denning in his now famous for judgment in the Court of Appeal in Dawnays v. F.G Minter [1971] 1 WLR 1250 has this to criticizing the frustrating effects of a long-drawn construction disputes resolution process.

“Cash flow is the lifeblood of the construction industry.” and that “One of the greatest threats to cash flow is the incidences of disputes, resolving then by litigation is frequently lengthy and expensive. Arbitrator in the Construction industry is often as bad or worse.”

In the standard forms of construction contracts, currently, the payment structures to the sub-contractors are divided into three: payment upon certification, direct payment from the employer, and contingent payment or conditional payment. However the main contractor disbursing the required payment to the sub-contractor in the first and third methods, the second method is only an employer and sub-contractor deal. As much as the payment of the amount due is concerned, the main contractor being a sheer concerned third party or ‘bystander’ in the second method (H. Singh, 2006).

The proposed CIPA Act is targeted to improve cash flow and to ensure that those have undertaken construction contracts do not put their private interests ahead of the nation. The Act is expected to play a crucial role in laying down the basic principles of the construction contracts and is expected to address the non-payment, late payment and other payment related issues in the construction industry. One of the provisions in the proposed Act is a speedy dispute resolution mechanism –adjudication.

Parliament sought to define adjudication in a proposed amendment to the then Housing Grants, Construction and Regeneration Bill. The definition was:

“For this purpose “adjudication” means a summary non-judicial dispute resolution process that leads to a decision by an independent person that is, unless otherwise agreed, binding upon the parties for the duration of the contract, but which may subsequently be reviewed by means of arbitration, litigation or by agreement.”

The contents of a Construction Industry Payment and Adjudication Act (CIPAA) (Ameer Ali, 2006, p. 9) are as below:

• A method for regular payment where there is no condition for a payment means in a

construction contract

• Prohibition ‘pay-when-paid’ and ‘pay-if-paid’ clauses in construction contracts

• The rights for suspension of works by a party who has not been paid

• The condition of a quick dispute resolution method called adjudication for disputes relating to

a construction contract

• The condition of remedies for the recuperation and security of payment under a construction

Payment in any industry is generally main problem of concern. In the construction industry, payment is an issue of major concern. This is because:

(a) Unlike many other industries, construction projects are of long durations, involving multiple phases of construction works such as site works, substructure, superstructure, finishes, external works, utilities, mechanical and electrical services etc. Payment problems in a construction project can severely affect cash flow and as a consequence the timely performance and quality of the project.

(b) The implementation of a construction project involves many parties from clients, developers, architects, engineers, quantity surveyors, contractors, sub-contractors, suppliers, skilled and unskilled workers etc. Problems in payment at the higher end of the hierarchy will lead to a serious knock-on cash flow problem down the chain of contracts.

(c) Terms of payment are usually based on credit rather than payment upon delivery which means contractors need a bigger capital outlay to undertake construction works before progress payment is made. Likewise, it is also common practice that architects and other construction professionals render their services before progress payment is made. Once projects are completed, the infrastructure becomes a fixture to the ground disabling any party to recover non-payment by removing any part of the completed infrastructure. Parties in the construction industry have no other effective remedy to recover non-payment.

In Asiapools (M) Sdn Bhd v IJM Construction Sdn Bhd [2010] 3 MLJ 7, the issue of claim for work done is whether payment claimed by subcontractor subject to ‘pay when paid’ clause, whether subcontractor entitled for payment only upon main contractor receiving payment from employer, and whether ‘progress payment’ includes final payment. In Union Workshop (Construction) Co v Ng Chew Ho Construction Co Sdn Bhd [1978] 2 MLJ 22, the issue of contract to build steel frames by a Sub-contract Works is whether payment to be by gross or by nett weight of steel used. The terms of sub-contract is clear, but whether reference can be made to terms of main contract. In Sime Engineering Sdn Bhd & Anor v Public Bank Berhad [2004] 7 MLJ 475, the issue of securities for advances or the Performance bond which is delay by guarantor bank to make payment under banker’s guarantee. Whether it is justified and whether claim for damages for late payment be allowed.

In ABB Transmission and Distributions Sdn Bhd v Sri Antan Sdn Bhd & Anor [2009] 7 MLJ 644, the issue of outstanding payments, whether first defendant breached subcontract by diverting and pocketing assigned payments from second defendant. In addition, whether first defendant breached subcontract when it delayed and disrupted plaintiff’s performance of subcontract causing latter to suffer various losses and expenses. In Ryoden (M) Sdn Bhd v Syarikat Pembenaan Yeoh Tiong Lay Sdn Bhd [1992] 1 MLJ 33, the issue of failure of main contractor to make payments duly certified by architect, whether liability contingent upon receipt from employer of the sums certified by payment certificates pursuant to main contract clause and whether it is incorporated in sub-contract. Further issue is whether main contractor entitled to be indemnified by sub-contractor for loss suffered from late completion by sub-contractor. In Hanshim Corp Sdn Bhd v New York Plastic Co Pte Ltd [1990] 1 MLJ 345, the issue of agreement by parties to undertake sub-contracting work on the terms of payment for ‘additional work’, whether ‘additional work’ or requests for extra work part of sub-contract agreement.

Adjudication is the viable tool for dispute resolution to resolve payment disputes. The introduction of adjudication must not be seen as a threat to construction arbitration. The emphasis of adjudication is on speed but not finality. The adjudication process complements arbitration and court litigation processes which are both final. Though final, the award or judgment of disputes through arbitration and court litigation takes too long and is therefore not effective for construction disputes. The adjudication process is binding, unless and until it is differently and finally determined by arbitration or the court.

Adjudication is not a condition precedent to arbitration or court litigation and in that sense not mandatory. Adjudication is a statutorily enabled, cheaper, speedier, time-bound, contemporaneous, binding dispute resolution mechanism which gives a party a statutory right to adjudication. If one party decides to exercise its rights to adjudication, then and only then, the other party must respond and will be drawn into adjudication. If parties decide not to opt to exercise their right to adjudication, they may opt for arbitration (if they have an arbitration agreement) or litigation or any other dispute resolution method, such as mediation, if they so wish – without referring the dispute to adjudication at all.

The arbitration process is intended to dispense ‘fine’ justice and practice in the construction industries around the world, including Malaysia, has seen it take months and quite typically years. Construction contracts to recognize this and all the standard forms of construction contracts in Malaysia provide for arbitration on most disputes to be referred only after the project is completed or alleged to be completed or terminated. Many parties to a contract cannot financially sustain such delayed justice.

Because arbitration is usually protracted, many have lamented in Malaysia and many other countries, that it could sometimes be more expensive than even litigation. There have also been comments suggesting arbitration is more like ‘litigation in private’ because much arbitration tend to follow many of the procedures used in court.

Adjudication under the proposed Act is an additional right to a dispute resolution method conferred statutorily. It is not meant to be a dispute resolution method that is a condition precedent to other dispute resolution methods. The parties may choose to go for adjudication or to some other dispute resolution method. But if one of the parties invokes the adjudication provision, the other is drawn in too. The intention of adjudication is to provide a dispute resolution mechanism that is speedy, time-bound, economical, rights based, contemporaneous, and binding, even if temporarily binding. It is often called ‘temporarily binding’ because the same dispute may subsequently be referred to arbitration. Thus all the dispute resolution methods can co-exist, and complement each other.

It attempts to resolve the pressing Malaysian payment problems and safeguards the construction industry stakeholder’s interest. The interest of arbitrators cannot rank ahead of the construction industry stakeholders who contribute to the economic growth of the country and are genuinely suffering because of the prevalence of payment problems.

4.0 CONCLUSION

As mentioned before, Malaysian construction industry is proposing to the Government on the enactment of the Construction Industry Payment and Adjudication Act (CIPAA). Once the Act is adopted, it will introduce a totally new regime of claims, adjudication and enforcement procedures in the event of disputes. These are all quite unfamiliar to the Malaysian construction industry. In the light of the tight timeframes and repercussions of the proposed Act, this is beneficial for those who are concerned in the industry to familiar themselves on the subject of the new legislation, specifically in the subject of adjudicators’ decisions. This also intended to enhance the confidence of practitioners in the Malaysian construction industry on the use of adjudication.