Malaysia – Case Spotlight: Federal Court Rules That Adjudication Applies To Final Payments.

25 August, 2019

 

On 1 August 2019, the Federal Court in Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd [Civil Appeals No. 02(f)-2-01/2018 and 02(f)-3-01/2018] conclusively determined the important issues of:

 

1. Whether the statutory adjudication process under the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) applies to final payments in a construction project;
2. Whether the adjudication process can apply when the construction contract has already been terminated and accepted by both parties; and
3. Whether the adjudication process under CIPAA can apply when there is a provision enacted for a specific dispute resolution mechanism under another written law (in this case, the Architect Act and the Architect Rules)

 

Background Facts

 

1. Martego Sdn Bhd (“Martego”) engaged Arkitek Meor & Chew Sdn Bhd (“AM&C”) as a project architect for a multi-storey development project in Kuala Lumpur (“Project”). AM&C’s scope of services included “contract administration” i.e: recommending the list of contractors and sub-contractors for tender and issuing progress claim certificates upon consultation with Martego.
2. On 7.8.2015, Martego terminated AM&C’s services and AM&C accepted.
3. However, a dispute arose as to the amount of professional fees for works done under the contract.
4. AM&C initiated adjudication proceedings under CIPAA to recover its fees, and the adjudicator awarded the sum of RM 258,550 to AM&C (“Adjudication Decision”).
5. Martego appealed to the High Court to set aside the Adjudication Decision on the basis that the adjudicator had acted in excess of jurisdiction and there was a denial of natural justice in the adjudicator’s failure to hold a hearing despite numerous requests (“Setting Aside Application”).
6. Concurrently, AM&C applied to the High Court to enforce the Adjudication Decision (“Enforcement Application”).
7. The High Court dismissed the Setting Aside Application and allowed the Enforcement Application.
8. On appeal, the Court of Appeal affirmed the High Court’s decision.
9. Martego appealed to the Federal Court.

 

Martego’s Position

 

The thrust of Martego’s position in support of the Setting Aside Application is:

 

1. There cannot be a valid adjudication under CIPAA when the payment claim was served after the construction contract had already been terminated and parties accepted the termination. Martego’s argument was that it is a requirement under CIPAA for a construction contract to be in existence. Once the construction contract had been terminated and accepted by AM&C, there was no longer a “construction contract” for the purpose of CIPAA.
2. Adjudication under CIPAA only applies to interim claims and not final claims. Among other things, Martego alleged:
3. that the phrase “final account” is not used in CIPAA and is an indication of the draftsmen’s intention to exclude final accounts. Further, a reading of CIPAA 2012 in its entirety indicates that CIPAA was only intended to apply to interim claims.
4. the main purpose of CIPAA is for parties to receive prompt payment for work done, and CIPAA is intended to be applied to interim claims which involved payments on account. Any dispute as to an amount that is finally due, should be resolved through other dispute resolution forums such as court or arbitration.
3. Disputes between an architect and his client should be resolved under the Architect Act and the Architect Rules, not under CIPAA. Martego argued that the Architect Rules and the Architect Act provided for a specific dispute resolution mechanism vis-à-vis architect’s fees, so this matter should have been arbitrated instead of going through adjudication.

 

Federal Court’s Findings

 

The Federal Court dismissed Martego’s appeal and held as follows:

 

1. CIPAA can apply even where the construction contract has already been terminated. An adjudicator acts within his jurisdiction in deciding on a matter referred to him under CIPAA when, at the time of service of the payment claim, the construction contract had been terminated and the termination was accepted by both parties and the claim was for determination of sums finally due to the unpaid party.
2. CIPAA applies to final payments and not just interim payments. The objective of CIPAA is to alleviate cash flow issues by providing an effective and economical resolution. There is no rhyme or reason for the Court to confine the applicability of CIPAA to interim claims only, especially when CIPAA does not mention the words “interim claim” or “final claim”. The word “payment” in CIPAA is defined to mean payment for work done or service rendered under the express terms of a construction contract. So long as there is a sum payable under a construction contract for work done and as long as the party remains unpaid, the claim can still be brought against the other party through CIPAA as it is payment dispute under the construction contract.
3. CIPAA and other dispute resolution mechanisms can run in parallel. There is nothing to stop CIPAA from applying to the case at hand even though there is a specific dispute resolution mechanism under the Architect Act and the Architect Rules. There is no need to see adjudication and arbitration as mutually exclusive to each other. Further, section 37 of CIPAA provides that an adjudication proceeding, arbitration and court litigation may proceed concurrently and in parallel. Adjudication is a mandatory procedure under CIPAA and the right to statutory adjudication should not be circumvented by any contract where parties have agreed to arbitrate.

For further information, please contact:

 

Donovan Cheah, Partner, Donovan & Ho

donovan@dnh.com.my