May 17, 2014
Dispute Boards & Adjudication in Malaysia : An Insight into the Road Ahead by Professor Datuk Sundra Rajoo
Dispute Boards and Adjudication in Malaysia – An Insight into the Road Ahead
(by Professor Datuk Sundra Rajoo © April 2014)
A paper presented at the DRBF 14th Annual International Conference on “Dispute Boards: Realising the Potential for Dispute Avoidance” at The Fullerton Hotel, Singapore on 17 May 2014.
- 1. Introduction
1.1 FIDIC based Dispute Adjudication Boards (DABs) were introduced into the FIDIC Forms of Contract in 1999, thereby allowing parties to a construction contract the right of having contractual adjudication. Yet, some 15 years later, there is little evidence of such boards being used in the Asian region. In fact the majority of employers actually delete or reduce the DAB provisions.
1.2 When institutions such as the World Bank and many other banks now insist on the inclusion of dispute boards in contracts for any project funded by them and institutions such as the International Chamber of Commerce recommends their use, it is difficult to see why there is such apparent resistance in this region.
1.3 Malaysia is the latest country to introduce statutory adjudication. The Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) received Royal Assent on 18th June 2012 and came into force on 15th April 2014. The procedure applies to construction contracts, and adjudicators are appointed by the Kuala Lumpur Regional Centre for Arbitration (“KLRCA”), being the adjudication authority under CIPAA. The adjudicator has 45 working days after issue of the response to the claim (or a reply) in order to issue a written decision.
1.4 The increased use of adjudication domestically in Malaysia as a result of local legislation is helping to make adjudication a frequently used procedure for the quick resolution of construction disputes.
1.5 This paper does not give a comprehensive treatment on CIPAA or FIDIC-DABs, but rather describes in general the mechanics of the Malaysian statutory adjudication procedure under CIPAA and distinguishes it from the Dispute Adjudication Board mechanism.
2. Pre-1999 – Early Background of “Adjudication” in the Malaysian Construction Industry
2.1 For decades prior to 1999, the only form of adjudication within the Malaysian Construction Industry had been carried out solely by the Contract Administrator or also known as:
- The “Superintending Officer” or “S.O.” under JKR 203 Form of Contract (Malaysian Public Works Department)
- “Architect” under PAM Contract (Malaysian Institute of Architects)
- “Engineer” under IEM Contract (The Institution Of Engineers Malaysia)
- “Engineer” under the FIDIC Contract (before 1999)
2.2 For convenience, all the above persons will be referred to as the “Superintending Officer” or “SO” or “superintendent”, collectively and separately.
In the Malaysian JKR 203 Form of Contract, the Superintending Officer, who is also the Contract Administrator and an employee of the client, is the “adjudicator” in disputes between the Contractor and the Employer. This is similar to the position of the “adjudicator” in the Joint Contracts Tribunal Form of 1980 where the architect plays a dual role: that of the contract administrator and as an adjudicator when a dispute arises between the employer and the contractor. To provide flexibility in the subsequent identification of the professional best suited to discharge the functions given to an architect or engineer under standard forms of contract, the term ‘superintending officer’ is often used to describe such a person and is being used to replace the terms ‘architect’ or ‘engineer’ in certain contracts.
2.3 As the SO administers the contract between the employer and the contractor: it has been shown that under the contract and in common law, the SO generally has two duties; first, as an agent to the employer; and, secondly, as a certifier. It is trite law that the certification duty of an SO, being a decision-making function, requires the certifier to act independently, fairly, impartially and professionally. This independent role arises notwithstanding the fact that the SO is employed by the employer to undertake such duties under the contract.
2.4 Contracts based on the JKR 203 Form of Contract usually provide for pre-arbitration resolution of disputes in general: a dispute or difference as described of whatsoever kind between the employer, the SO or the superintending officer’s representative and the contractor must in the first place be referred to the SO for his decision and this reference to the SO is a condition precedent to any reference to arbitration.
2.5 If the Contractor (or the Employer) disagrees with the SO’s decision, he may give notice of disagreement and require the dispute to be referred to Arbitration after completion, termination or abandonment of the Contract.
2.6 Notwithstanding a Party’s disagreement, the works have to be continued and the Parties must fulfil their contractual obligations in accordance with the Contract and SO’s decision leaving any outstanding dispute to be resolved another day. In most of the traditional forms of Contract (except FIDIC Forms of Contract) arbitration may commence only after completion, termination and abandonment of Contract, except for certain type of disputes which may be arbitrated immediately, e.g. failure to pay or to issue interim certificates of payment, the consequences of war and hostilities, etc.
2.7 For some time this system worked well until around the 1980’s, when the Construction Industry began to take the general view that it did not work well (mostly for the Contractor) as the SO could not be expected to be impartial due to the following:
(a) SO is employed directly or as a Consultant by the Employer (or Owner).
(b) SO issued the disputed decision or instruction in the first place, and usually could not be expected to change his earlier decision.
2.8 Findings of a study conducted by Mohd. Danuri et al. show that the employer’s undue influence is the main reason for an SO’s failure to be fair and professional in performing his, or her duty. In addition, Ndekugri et al. in their study have also discussed the problems with the traditional duality role of an engineer under the FIDIC’s Standard Form of Contract or the “Red Book”; that is, as the employer’s agent and as an independent third party, which has been the subject of persistent criticism. It is therefore well anticipated in the Malaysian construction industry that the deficiency in the contract administration practice provided in the contract itself may generally impede contractual justice, which makes construction disputes inevitable.
2.9 In this regard, it is suggested that the concept of FIDIC-DAB, although not presently existing in the form of a statute law, has been introduced in the construction industry of other major jurisdictions within this jurisprudential rationale generally to help promote contractual justice, and ultimately, to avoid construction dispute
3. Post 1999 – Dispute Adjudication Boards (DABs) within FIDIC Form of Contracts
3.1 A brief background on Dispute Adjudication Boards; its use by Common Law and Civil Law jurisdictions and Multilateral Development Banks (MDBs)
3.1.1 Contractual Adjudication via FIDIC based Dispute Adjudication Boards (DABs) and their correlatives under the FIDIC Multilateral Development Banks (MDBs) harmonised version, Dispute Boards, have two purposes. They help avoid disputes and they decide on unavoidable disputes. Dispute avoidance is as important as dispute resolution. This dualistic concept has a wide acceptance throughout the world and has to some extent become the international standard in the construction industry. It is used for public works and infrastructure projects, but also for privately financed projects, albeit in the private sector the reduced role of a dispute resolver prevails. The concept has also been tested in a Common Law and Civil Law context.
3.1.2 The basic and fundamental principle, which allows agreements on dispute adjudication is usually referred to as the principle of contractual freedom. This principle is recognized worldwide, both in Common Law countries like Malaysia (Section 10, Contract Act 1950), India, Pakistan, Singapore and in Civil Law countries like Indonesia (see Article 1338, Civil Code), Philippines (see Article 1306, Civil Code), South Africa and Sri Lanka (Dutch Roman Common Law) or Vietnam (see Article 389 Civil Code). Contractual freedom typically includes the right of the parties to confer the right of determination of the performance upon a third person (see Article 1309 Civil Code Philippines).
3.1.3 FIDIC Forms of Contract suggest either a three member or a one member Board (DAB), which shall be formed within twenty eight (28) days of commencement of work, by mutual agreement of the Parties. If the Parties fail to agree on the appointment of a member (or members) either party may file a request to the FIDIC President in order to seek the appointment of any of the Board Members. The Board shall begin its activities following the signing of a Dispute Adjudication Board Agreement incorporating General Conditions of Dispute Adjudication Agreement and the Procedural Rules. The Board members are independent experts and not employees or agents of either the Employer or the Contractor. Board members shall not assign or subcontract any of their services or duties. The Board shall visit the Site and meet with representatives of the Parties and the Engineer at regular intervals, at times of critical construction events, at the written request of either party. The timing of Site visits shall be as agreed among the Employer, the Contractor, and the Board, but failing agreement shall be fixed by the Board. Site visits shall include an informal discussion of the status of the construction of the Works and an inspection of the Works. Upon joint request of the parties the Board may submit recommendations and opinions.
3.1.4 Whenever a dispute will be referred to the DAB it will hear the case and make a decision within 84 days. Unlike an arbitral tribunal the Board is authorised to investigate the merits. Normally hearings will be conducted at the Site. However, any other location that would be more convenient and still provides all required facilities and access to necessary documentation may be utilized by the Board. The Board may also proceed without oral hearings. After the hearings are closed, the Board shall meet in private in order to reach a decision. The Board’s decision, together with reasons, shall be served in writing to both Parties. The decision shall be based on the pertinent Contract provisions, applicable laws and regulations, and the facts and circumstances involved in the dispute.
3.1.5 FIDIC Boards have jurisdiction for all disputes which arise out of the Contract or in connection with the Contract. A Board may typically open up, review and revise any certificate, determination, instruction, opinion or valuation of the Engineer (Red & Yellow Book) or Employer´s Representative (Silver & Gold Book) as the case may be. A DAB decision shall be binding on the Parties who shall give prompt effect to the decision.
3.1.6 It shall be given in accordance with Sub‐Clause 20.4 of the FIDIC Conditions of Contract (1999).
3.1.7 Hence, unlike statutory adjudication under the Statutes in Malaysia, Singapore and Australia, FIDIC Boards have full jurisdiction on all matters including extension of Time for Completion claims and other matters. Arbitration panels have jurisdiction to enforce final and binding DAB decisions (see Sub-Clause 20.7 FIDIC 1999).
3.1.8 As of the past decade, Multilateral Development Banks have been seen to favour the incorporation of the FIDIC Conditions of Contract in their Standard Bidding Documents for Works. Currently they use the harmonised version of the Red Book which is based on a FIDIC licence. The Bank´s DAB or DB policy is not yet very clear.
3.1.9 Pursuant to the World Bank Procurement Guidelines, the conditions of contract shall include provisions dealing with the applicable law and the forum for the settlement of disputes. International commercial arbitration has practical advantages over other methods for the settlement of disputes. Therefore, the World Bank recommends that Borrowers use arbitration in contracts for the procurement of goods and works. The Bank shall not be asked to name arbitrators. In the case of works contracts, supply and installation contracts, and turnkey contracts, the dispute settlement provision shall also include mechanisms such as dispute review boards or adjudicators, which are designed to permit a speedier dispute settlement. Nowhere is it mentioned that DBs are required, albeit the Standard Bidding Documents include the related DB provisions as suggested by FIDIC, though the wording had been changed from Dispute Adjudication Board to Dispute Board.
An observation in practice however seems to suggest that multilateral development banks do not unanimously and clearly insist on the use of DBs. Frequently, Employers delete DB clauses arguing that they do not comply with the law. The truth is presumably that the banks have no clear policy on the eligibility of DB cost and that employers like to save cost without knowing the disadvantages of such practices.
As a consequence of this, currently the Japan International Cooperation Agency (JICA) is working closely with the Asian Development Bank in a joint effort to promote the use of DBs within the region.
4. Contractual Adjudication – DAB in FIDIC Types of Contracts
4.1 While in a FIDIC Contract the Superintending Officer (“SO”; in FIDIC Contract he is known as the “Engineer”) remains as the Contract Administrator, he or she will not be tasked with adjudication in the event any dispute arises. This role as an “adjudicator” shall fall under the DAB.
4.2 The parties to the FIDIC Contract, being the Employer and Contractor, shall appoint the DAB via mutual agreement for the entire duration of the Contract with the DAB’s fees being shared equally by both parties. Thus, with the shift of the “Adjudication” role from the SO to the DAB, difficulties relating to independence and impartiality is no longer an issue.
4.3 While the DAB’s decision shall be temporary binding (if disputed by parties), works relating to the contract shall still continue as per the rendering of the DAB’s decision. As an enforcement measure, the FIDIC Contract provides for contractual sanctions if the decision of the DAB is not implemented.
4.4 The FIDIC model of Contractual Adjudication therefore provides the following:
i) An impartial DAB
ii) Temporary binding decisions of DAB (if disputed) to be referred to arbitration
iii) DAB decisions to be implemented notwithstanding any reference to arbitration
iv) DAB decision to be final and binding if not disputed within a time limit, as was the case with SO decisions prior to 1999 under FIDIC and other traditional forms of Contract.
4.5 Under FIDIC (before and after 1999), and dispute with the SO or DAB’s decision (either arising from the Employer or Contractor) can be referred to arbitration at any time and not necessarily deferred to a later day as in most other commonly used forms of Contract today.
4.6 After 1999, the FIDIC Form of Contracts incorporated an “amicable settlement” step (non-mandatory) before Parties go to arbitration. This however, does not alter the Dispute Management process, since settlement by amicable agreement is consensual, and this step was actually offered under the pre-1999 Forms, without it being “mandated” in the FIDIC Conditions of Contract. This option invites a certain amount of criticism, as it may be rendered superfluous due to the fact that Parties cannot be compelled to settle. In the event there is no will between the Parties to settle, this exercise may be rendered futile.
4.7 Essentially, the pre-1999 and post-1999 dispute management processes are similar in principle, with the only difference being the introduction of the DAB which reviews the initial decision of the SO (in FIDIC, the Engineer) instead of the SO conducting a self-review of his or her decision. This aspect itself is a massive step up as it dispels any issues regarding impartiality and independence within the adjudication process.
4.8 A prominent feature of post-1999 FIDIC Forms of Contract is that arbitration does not form part of the Dispute Management process carried out by the DAB (or SO) as any preliminary Dispute Management process is completed once a decision is made on a dispute referred to a DAB.
4.9 Should the DAB’s decision be disputed by any of the Parties, Arbitration proceedings may be commenced by either side of the Parties. The Arbitration proceeding shall then provide a final and binding award.
5. Statutory Adjudication – Construction Industry Payment and Adjudication Act (CIPAA)
5.1.1 One of the flaws existing within the FIDIC-DAB procedure is that it is only made available to contracts that are drafted based on the FIDIC model. In Malaysia however, many contracts especially those that consist of lower value contracts which adopt simplified formats, are bedevilled by disputes that mainly concern payment issues. These non-FIDIC based contracts contain no specific “adjudication” provisions (other than reference of the dispute to the SO). Some bespoke contracts do not even contain any provision offering any sort of dispute management or resolution process.
5.1.2 As a result of this limitation, some countries have gone ahead to enact statutory “Adjudication” provisions that to address cash flow problems. Such was required to that Contractors and Sub-Contractors were not deprived of “the life blood of the construction industry” as the works progress. Countries which have enacted the adjudication statutes include the UK, Australia, New Zealand and Singapore.
5.1.3 Malaysia is the latest country to enact an adjudication statute, being the Construction Industry Payment and Adjudication Act (CIPAA) (hereinafter referred to as “the Act”), which was passed as law by the Parliament on 22 June 2012, and came into force on 15th April 2014.
5.1.4 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.
5.1.5 The Act allows for a party who is owed monies under a construction contract to promptly obtain payment from the non-paying party, based on assessment of the merits of the claim by an appropriately qualified and independent industry expert i.e. the Adjudicator.
5.1.6 The Act removes the pervasive and prevalent practice of conditional payment (‘pay when paid’, ‘pay if paid’ and ‘back to back’) and reduces payment default by establishing a cheaper and speedier system of dispute resolution in the form of adjudication.
5.1.7 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.
5.1.8 In general, all the abovementioned “adjudication” statutes use the issue of payment as a trigger point to invoke Adjudication. This inevitably leads to the necessity of the following issues raised in defence of non-payment, being:
i) Quality of Work
ii) Set-offs due to:
a) Liquidated and Ascertained Damages (LAD) and Extension of Time (EOT) issues
b) Defaults made good by Employer (e.g. defects, insurances, DOSH, DOF, requirements, etc.)
5.1.9 CIPAA-based statutory adjudication plays a beneficial role by protecting weaker parties in construction contracts that do not provide for contractual “Adjudication” or other forms of dispute management or resolution mechanism as in the case of FIDIC and other standard forms.
5.2 Concurrent Actions under CIPAA-based Statutory Adjudication and FIDIC-based Contractual Adjudication
5.2.1 FIDIC based contractual adjudication is easily distinguishable from CIPAA based statutory adjudication; while the former provides for a single “Adjudication” Board, being the DAB from the beginning till the end of the Contract, the latter offers appointment of an Adjudicator on an ad-hoc basis for a dispute that arises.
5.2.2 The FIDIC-DAB procedure under its Adjudication Rules involves a strict requirement whereby the DAB shall visit the site relating to the dispute for familiarization with the nature and progress of the works throughout the execution of the Contract period at intervals of 70 to 140 days or as required. It is an “on-site” procedure.
5.2.3 Thus, as the procedure in CIPAA involves the Adjudicator being appointed on an ad-hoc basis, it has resulted in the Contract being confronted with multiple adjudications with multiple adjudicators.
5.2.4 The same can be said for any reference to arbitration (if an Adjudication decision is disputed) under both FIDIC and CIPAA (if the Contract has provision for arbitration), and Parties may have to deal with multiple arbitrations under different arbitral tribunals throughout the Contract period.
5.2.5 This characteristic of CIPAA is possibly detrimental, due to duplicity and concurrency of actions that may take place. Duplicity and concurrency of actions may result in the construction and supervisory staff involved in the Dispute Management process to be preoccupied and diverted from their main purpose in the Works; ensuring the completion of the construction works within the construction period.
The following provision under CIPAA is relevant:
Section 37 of CIPAA reads as follows:
(1) A dispute in respect of payment under a construction contract may be referred concurrently to adjudication, arbitration or the court.
(2) Subject to subsection (3), a reference to arbitration or the court in respect of a dispute which is being adjudicated shall not bring the adjudication proceedings to an end no affect the adjudication proceedings. …
5.2.6 The hierarchy of precedence of decisions under actions at Court, Arbitration and Adjudication are clear:
FIDIC-DAB – If a Party is not satisfied with the DAB decision, the dispute would progress to arbitration, and finally to court (if necessary).
CIPAA – A disputed “adjudication” decision may progress to arbitration if the parties are bound by an arbitration agreement; otherwise a dissatisfied party can take the matter to Court.
Under Section 37(1), a party may even commence arbitration or Court action concurrently with the adjudication process. What is not certain however is whether this position would still apply if there are contractual conditions which would bar such concurrent actions.
5.2.7 The reasoning behind the enacting of Section 37 is to ensure that the works continue as planned and not be impeded, as it is gives effect to the premise of ‘pay first, argue later’ in order not to allow any constriction of the relevant parties’ cash flow.
5.2.8 With reference to Subsection (2) of Section 37, while there may be concurrence of actions besides adjudication, it allows for CIPAA Adjudication to resolve cash flow problems within the 45 working days period allowed for the Adjudicator to deliver the adjudication decision under Section 12 of CIPAA. Thus, it is well anticipated that the adjudication decision may be rendered and be enforced much earlier as compared to the arbitration proceedings that are concurrently being held. Ultimately, CIPAA provides a binding decision on a payment dispute within a short time frame after referral, which can be enforced in the interim pending any subsequent or concurrent reference to another forum for review.
5.2.9 Comparatively, when it comes to arbitration, other commonly used forms such as the JKR 203 Form of Contract, PAM Contract and IEM Contract forms are far more unsatisfactory, in not allowing most types of disputes to be arbitrated or adjudicated until after the Works have come to an end.
6. Enforcement of Adjudication Decisions under FIDIC and CIPAA
6.1 For a DAB decision awarding a sum to a contractor under Sub-clause 20.4 of the FIDIC Red Book 1999 for which the employer has given a timely notice of dissatisfaction against the DAB decision, the DAB decision has to be accepted and given effect to in the interim, pending further reference, in the event of disagreement, to arbitration or litigation.
6.2 Under the post-1999 FIDIC Red Book, remedies for non-compliance with DAB decisions are provided for under the Contract.
Clause 16.1 provides that the Contractor can suspend or slow down progress for the works. The Owner could exercise the contractual remedy of deduction from payments due to the Contractor.
6.3 Similarly, Section 29(1) of CIPAA entitles the Claimant the right to suspend the performance, or reduce the rate of progress of performance if the adjudicated amount pursuant to an adjudication decision has not been paid wholly or partly after the receipt of the said decision under Section 12(6). Section 29 reads as follows:
(1) A party may suspend performance or reduce the rate of progress of performance of any construction work or construction consultancy services under a construction contract if the adjudicated amount pursuant to an adjudication decision has not been paid wholly or partly after receipt of the adjudicated decision under subsection 12(6).
(2) The party intending to suspend the performance or reduce the rate of progress of performance under subsection (1) shall give written notice of intention to suspend performance or reduce the rate of progress of performance to the other party if the adjudicated amount is not paid within fourteen calendar days from the date of receipt of the notice.
(3) The party intending to suspend the performance or reduce the rate of progress of performance under subsection (1) shall have the right to suspend performance or reduce the rate of progress of performance of any construction work or construction consultancy services under a construction contract upon the expiry of fourteen calendar days of the service of the notice given under subsection (2).
(4) The party who exercises his right under subsection (3) —
a) Is not in breach of contract;
b) Is entitled to a fair and reasonable extension of time to complete his obligations under the contract;
c) Is entitled to recover any loss and expenses incurred as a result of the suspension or reduction in the rate of progress of performance from the other party; and
d) Shall resume performance or the rate of progress of performance of the construction work or construction consultancy services under a construction contract in accordance with the contract within ten working days after having been paid the adjudicated amount or an amount as may be determined by arbitration or the court pursuant to subsection 37(1).
Use of the word “may” gives the Claimant discretion in exercising the said remedies which have to be in the alternative (note the employment of the term ‘or’).
6.4 Prior to the introduction of CIPAA, the stance taken was: unless there is an express provision in the construction contract permitting the contractor to slow down his work progress and/or suspend the same owing to the employer’s failure to make relevant payment due, any such action on his part can be tantamount to a breach of contract (see Kah Seng Construction Sdn Bhd v Se/sin Development Sdn Bhd and also Yong Mok Hin v United Malay States Sugar Industries Ltd). This has now been statutorily reversed by CIPAA 2012, in particular vide Section 29 (See especially Section 29(4)(a)). CIPAA provides vide Section 31(1) that a party (i.e. the Claimant) who has obtained an adjudication decision pursuant to the Act in his favour may, unless a stay is granted under Section 16, exercise any or all of the remedies provided in the said Act concurrently as a means of enforcing the adjudicator’s decision.
6.5 The said entitlements under Section 29 accrue in two situations, namely, when either the whole or part of the adjudicated amount has not been paid. Though appearing drastic, it is unlikely that the second situation will be effected by a prudent Claimant unless it is a serious or repetitive default on the employer’s part. However, the option is still there for him to exercise.
6.6 The Act however subjects the Claimant’s exercise of the said entitlements to strict procedural conditions and tight timelines although the precise timing for him to do so has not been expressly stipulated. Presumably, the Claimant has to act with due expedience; failing which he may, for all intents and purposes, be guilty of waiver or laches. If and when the Claimant decides to either suspend performance or reduce its rate, he must notify the respondent in writing of his intention to do so; the notice being served in accordance with the stipulations of Section 38 (Services of Notices and Documents). The Claimant is required to give the respondent a definite time which should not be more than 14 days of the receipt of the notice (see section 29(2)).
6.7 In addition, under Section 28 of CIPAA, enforcement of an adjudication decision can be made through the Court. Section 28 reads:
(1) A party may enforce an adjudication decision by applying to the High Court for an order to enforce the adjudication decision as if it is a judgment or order of the High Court.
(2) The High Court may make an order in respect of the adjudication decision either wholly or partly and may make an order in respect of interest on the adjudicated amount payable.
However, a party may resist enforcement by invoking Section 16, which provides:
(1) A party may apply to the High Court for a stay of an adjudication decision in the following circumstances:
(a) an application to set aside the adjudication decision under Section 15 has been made; or
(b) the subject matter of the adjudication decision is pending final determination by arbitration or the court.
(2) The High Court may grant a stay of the adjudication decision or order the adjudicated amount or part of it to be deposited with the Director of the KLRCA or make any other order as it thinks fit.
Thus, a Party may resist enforcement of Adjudication decisions by pleading one of the above grounds. This can defeat the very purpose of CIPAA which is to sustain the flow of cash, being the ‘life blood’ of the construction industry, while the construction is in progress.
6.8 On the other hand, Section 16(2) of CIPAA requires no mandatory security and it is left to the Court’s discretion. If no such security is ordered, it could occur that by the time (if) a favourable decision is finally made for the payee, he could find himself holding a valueless adjudication decision, arbitration award or court judgment.
7. Jurisdiction of Adjudicators under CIPAA
7.1 Section 27 of CIPAA, when read together with Sections 5 and 6, provides for the scope of the arbitrator’s jurisdiction:
(1) Subject to subsection (2), the adjudicator’s jurisdiction in relation to any dispute is limited to the matter referred to adjudication by the parties pursuant to sections 5 and 6.
(2) The parties to adjudication may at any time by agreement in writing extend the jurisdiction of the adjudicator to decide on any other matter not referred to the adjudicator pursuant to sections 5 and 6.
7.2 Under Section 27(1), a references to Sections 5 and 6 of CIPAA are made. Section 5 provides for a payment claim to be initiated by the Claimant (or unpaid party). Therefore, to begin with the Adjudicator’s jurisdiction is about primarily about payment (or lack of payment).
7.3 Section 6 of CIPAA further extends the adjudicator’s jurisdiction to look into other matters related to payment of the construction in dispute. Section 6 provides that the Respondent (or non-paying party) replies with a payment response in which he states the amount disputed and the reason why he is not paying (either in whole or in part). This would probably mean that the payment dispute would likely be attributed to the following related (or connected and incidental matters); defective works and set-off for LAD, or expenditure incurred on behalf of the unpaid party (usually the Contractor) such as insurances, direct payments to Sub-contractors and suppliers, etc.
8. Distinguishing functions of both CIPAA Statutory Adjudication and FIDIC-DAB Contractual Adjudication
8.1 The principles are clear; the scope of FIDIC-DAB’s functions and decisions do not fall under the provision of CIPAA. As a matter of fact, they are both creatures of polar opposites; with the DAB being an entity created entirely by Contract, not falling under CIPAA, and therefore is not governed by CIPAA.
8.2 The only similarity they share is in their namesake of “Adjudication”. The term “Adjudication” was first used in FIDIC in 1999 to distinguish the function of DAB from “arbitration”. Coincidentally, this term was later adopted by lawmakers for introducing statutory “Adjudication” i.e. Construction Industry Payment and Adjudication Act 2012 (CIPAA).
8.3 Perhaps a more distinct defining of the two processes ought to provide for more clarity and avoid confusion as to their scope and applicability; it has been suggested that other terms may more suited to replace the presently named Dispute Adjudication Board (DAB), e.g. “Dispute Management” (DM) and with it the “Dispute Management Board” (DMB).
8.4 Such use of this new contractual term will in no way alter or detract from the function and effect of the presently-named DAB, as such function and effect are clearly spelled out in detail in the FIDIC Forms of Contract and its annexure on the Procedural Rules for DAB.
9. Saving of Rights and Exemptions from Application of CIPAA
9.1 Section 31(2) of CIPAA provides that the remedies provided by the Act are “… without prejudice to other rights and remedies available in the construction contract or any written law, including any penalty provided under any written law”.
9.2 The effect of Section 31(2) of CIPAA is that FIDIC-DAB and its function as a contractual provision for Contract Management is not in conflict with CIPAA. However, enforcement of DAB decisions will fall back on the FIDIC contract provisions, and not under CIPAA.
9.3 Section 40 of CIPAA states that the Minister may grant any exemption after considering the recommendation of the adjudication authority (hereby being the KLRCA). The enacting of this provision has caused much debate. Section 40 reads:
The Minister may, upon considering the recommendation of the KLRCA, by order published in the Gazette, exempt —
a) Any person or class of persons; or
b) Any contract, matter or transaction or any class thereof,
From all or any of the provisions of this Act, subject to such terms and conditions as may be prescribed.
The intention of such provision has been echoed by the recent proposal from the Malaysian Ministry of Works requesting for Government construction contracts worth RM20 million and less to be exempted from CIPAA application.
9.4 According to the Ministry of Works, it is seeking an “interim exemption” for such projects at the state and district level where the project management teams “need some time (about two years) to adjust to the requirements of the Construction Industry Payment and Adjudication Act 2012 (CIPAA)“. The said move has been met with heavy opposition stemming from the Malaysian Bar and among major industry associations such as the Master Builders Association Malaysia (MBAM) and Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM), as the said exemptions would impact many small contractors when putting forward their claims against the Government. Industry experts believe the move will undermine a substantial basis of the legislation.
9.5 The Construction Industry Payment and Adjudication (Exemption) Order 2014 seeks to exempt two categories of Government construction contracts. The first category of Government construction contracts are contained in the First Schedule of the Exemption order, namely a contract for any construction works that involve emergency, unforeseen circumstances and that relate to national security or security related facilities.
9.6 The second category of Government construction contracts are contained in the Second Schedule of the Exemption order, namely construction contracts with the Government of the contract sum of twenty million ringgit (RM20,000,000) and below. With regards to this second category, the exemption order merely exempts these contracts from the application of subsections 6(3), 7(2), 10(1), 10 (2), 11(1) and 11(2) of CIPAA 2012, and relates to the timeline for submissions and replaced with a set of longer timelines for such submissions. It is also a temporary exemption from 15 April 2014 to 31 December 2015 for this second category. However, the exemption order does not extend to construction contracts to which the Government is not a party.
9.7 Section 41 of CIPAA provides:
Nothing in this Act shall affect any proceedings relating to any payment dispute under a construction contract which had been commenced in any court or arbitration before the coming into operation of this Act.
For the purposes of administration of adjudication cases by the KLRCA under CIPAA, including the appointment of an adjudicator under CIPAA, the KLRCA takes the position that CIPAA applies to a payment dispute which arose under a construction contract on or after 15.4.2014, regardless of whether the relevant construction contract was made before or after 15.4.2014. In this regard, a payment dispute under a construction contract is said to have arisen when the non-paying party has, in breach of the contract, failed to make payment by the contractual due date for payment.
9.8 There also remains the question of whether parties to a Malaysian construction contract can opt to contract out of CIPAA, based on the doctrine of Freedom of Contract.
In hindsight, this does not seem possible especially when the Act is meant to be construed as a whole. However, as the Act has yet to be put into practice, it remains to be seen whether parties will execute such manoeuvre.
10. Examples of Application of FIDIC-DABs in Malaysia
10.1 The extent of implementation of DABs in the Malaysian construction industry has so far been scarce at best. As there remains a misconceived view that high costs are required towards maintaining the board, it has resulted in DABs being applied exclusively in several mega projects by the Malaysian government, namely the SMART tunnel project and BAKUN dam project.
10.2 SMART Tunnel Project – Arbitration Proceedings by Wayss & Freytag (Malaysia) Sdn Bhd Against MMCEG-GAMUDA Joint Venture (JV)
Under a Sub-Contract (TBM Tunnel Boring Contract, North Tunnel Drive) dated 16April 2003, the JV awarded to Wayss & Freytag the contract to construct and complete the North Tunnel Drive of the SMART Project. Due to Wayss & Freytag’s inordinate delay in the progress of its work, the JV terminated the Sub-Contract on 23January 2006 in accordance with the terms and conditions of the said Sub-Contract.
Following the said termination and in accordance with the terms and conditions of the Sub-Contract, both the JV and Wayss & Freytag submitted various claims against each other to be adjudicated by the Dispute Adjudication Board (“DAB”). The JV’s total claim against Wayss & Freytag is for the sum of RM 161,211,524.80. Wayss & Freytag’s total claim against the JV is for the sum of RM 153,818,256.63.
According to the DAB’s decisions on the various claims submitted, the JV is to pay Wayss & Freytag a sum of RM 102,366,880.42.
Under the terms of the Sub-Contract, any party who is dissatisfied with the decisions of the DAB may issue a Notice of Dissatisfaction and require the matter to be referred to arbitration. The JV had issued several Notices of Dissatisfaction against the DAB’s decisions and had duly commenced arbitration proceedings in that respect. Similarly, Wayss & Freytag had also issued Notices of Dissatisfaction against the DAB’s decisions, and had issued a Notice of Arbitration to refer its claims to arbitration, in the sum of approximately RM151,279,445.58.
On 16April 2013, the arbitral tribunal issued its award giving the following directions:
(i) That the JV’s claim against Wayss & Freytag (Malaysia) Sdn Bhd’s (“Wayss & Freytag”) fails and is dismissed;
(ii) That Wayss & Freytag’s claim succeeds in substantial part and the JV shall pay Wayss & Freytag the sum of RM 96,297,229-03 together with interest thereon at 5% per annum from 16 April 2013; and
(iii) That the JV shall pay Wayss & Freytag the sum of RM 9,000,000-00 as costs.
It is interesting to note from the above arbitration that the relevant Sub-Contract above allowed for the implementation of a Dispute Adjudication Board (DAB).
A DAB is distinguishable from a Dispute Review Board (DRB) in the following aspects:
- Where the DAB’s decision is immediately binding on both parties, the DRB’s decision only provides for non-binding recommendations on both parties to a project;
- The DAB procedure is more structured and formal;
- The DAB is given a longer time to provide its decision;
- A matter cannot be referred to DAB unless it is in dispute; and
- Any decisions of DAB is admissible in evidence in any subsequent arbitration proceeding.
As compared to DRB and other dispute avoidance mechanisms, DAB is promoted by the FIDIC General Conditions of Contract and has been internationally recognised, as the World Bank makes it mandatory to use the form for all project financing.
With that said, a DAB and DRB do share similarities in the aspect where both comprise of a panel of technical experts that becomes part of the project and are familiar with the project’s contract and on-site progress.
10.3 Mersing Construction and Engineering Sdn Bhd v Kejuruteraan Bintai Kindenko Sdn Bhd & Ors
In the instant case, the plaintiff was appointed by the 2nd defendant as a subcontractor for a Pipe Jacking and Manholes Subcontract for the construction of KL sewerage treatment plant project. The plaintiff was claiming from the 2nddefendant RM914,110.55 for work done under the subcontract. This was the second defendant’s application for a stay of proceedings. In applying for a stay the second defendant submitted that it was settled law that if the parties agreed to refer to arbitration as provided in the agreement then the court ought to grant a stay of proceedings pursuant to s 10 of the Arbitration Act 2005