Introduction
The long-anticipated ascertainment from the Federal Court has finally arrived to address one of the most controvertible questions in the construction industry in Malaysia, that is, whether the Construction Industry Payment Adjudication Act 2012 (“CIPAA”/“the Act”) confers a retrospective or prospective application on construction contracts.
The Federal Court in Jack-In Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd [Civil Appeal No.: 02(f)-58-07/2018(B)] (“Jack-In Pile”) and Ireka Engineering & Construction Sdn Bhd v PWC Corporation Sdn Bhd [Civil Appeal No.: 02(f)-124-12/2018 (W)] (“Ireka Engineering”) unanimously held that the Act only applies prospectively to construction contracts signed after the Act came into force, that is, 15 April 2014.
The Federal Court addressed the following questions of law1:
Jack-In Pile
- Whether CIPAA applies to construction contracts entered into before the coming into operation of CIPAA i.e. 15 April 2014?
- If the answer to (i) is affirmative, does it follow that Section 35 of CIPAA 2012 should also apply to construction contracts entered into before the coming into operation of this Act?
Ireka Engineering
- Whether CIPAA gives rise to substantive rights and is consequently not retrospective in nature, making the Adjudication Decision liable to be set aside?
- Whether the CIPAA which came into force on 15 April 2014 is retrospectively applicable to a subcontract that was signed and dated prior to the enforcement date, or will it render the entire Adjudication proceedings, including the Adjudication Decision, void?
On 16 October 2019, the Federal Court in both Jack-In Pile and Ireka Engineering unanimously avowed that CIPAA does not apply to construction contracts entered into before the effective date of the Act, which is 15 April 2014. In other words, CIPAA operates prospectively in the building industry.
The background facts: Jack-In Pile and Ireka Engineering
Jack-In Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd
In Jack-In Pile, the contract was dated 16 March 2011. The contention stemmed from Clause 11.1 of the agreement, which provides for a “pay-when-paid” mode of payment term for the related progress claims.
At the first instance, the High Court held that Clause 11.1 being a conditional payment provision was rendered void by section 35 of CIPAA (“Section 35”). The High Court enunciated that CIPAA applies to all construction contracts or disputes notwithstanding whether the contract was made or the dispute arose before or after the enforcement date of the Act.
On appeal, the Court of Appeal found that Section 35 relates to and affects a substantive right of a contractual party as it takes away the right of the party to rely on a “pay-when-paid” clause which has been agreed in the contract. Thus, the Court concluded that Section 35 only applies to contracts entered into after the coming into force of the Act, that is, the said section is prospective in nature.
Ireka Engineering & Construction Sdn Bhd v PWC Corporation Sdn Bhd
In Ireka Engineering, the agreement was entered into on 15 September 2009. The appellant sought to apply the cross-contractual set-off provisions under Clause 13.1 of the agreement.
By virtue of the expression “a construction contract” in section 5(1) of the CIPAA, both the Court of Appeal and the High Court held that CIPAA does not allow cross-contractual set-offs and denied the appellant’s right to rely on Clause 13.1 for the said purpose.
The new law: Federal Court decisions
The Federal Court stated that, in common law, there is a prima facie rule of construction that a statute should not be interpreted retrospectively so as to impair an existing substantive right or obligation of a party unless a contrary intention of Parliament appears2. The Federal Court stressed that CIPAA cannot apply retrospectively as it would prejudicially affect the parties’ vested rights or the legality of the transaction under the contract3.
The Federal Court referred to sections 19(1), 43(a), 2(1) and 2(3) of the Interpretation Acts 1948 and 1967 and held that if Parliament had intended for CIPAA to be applied retrospectively, given its full awareness of the cash flow problems in the industry, it would have expressly included a provision to that effect4.
CIPAA does not contain any express provisions in relation to the issue of its retrospective or prospective operation. Thus, in the absence of clearly worded intention to the contrary by Parliament, the Federal Court affirmed that CIPAA does not in any way entail retrospective application. This principle is entrenched in the Article 66 Clause (5) of the Federal Constitution5.
Conclusion
It is now settled that CIPAA governs construction contracts formed after 15 April 2014, and not those before that. For payment disputes arising from any construction contract formed before 15 April 2014, parties would have to resolve their disputes through the usual course of arbitration or litigation. Hence, any adjudication proceedings based on a claim arising under a construction contract entered into before 15 April 2014, including the Adjudication decisions, are null and void6.
The Federal Court decisions do however leave a few areas of ambiguity that have not been addressed:
- Where the adjudication decision has already been enforced as a Court judgment, can the aggrieved party now apply under section 15 of CIPAA to set aside the adjudication decision (and consequently the Court judgment)?
- Can the aggrieved party (including an employer who had made payment pursuant to section 30 of CIPAA) now demand for the refund of the monies paid in compliance with an adjudication decision, which is void?
This update is issued for the information of the clients of the Firm and covers legal issues in a general way. The contents are not intended to constitute any advice on any specific matter and should not be relied upon as a substitute for detailed legal advice on specific matters or transactions.
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1. Jack-In Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd, at paragraph [4]; Ireka Engineering & Construction Sdn Bhd v PWC Corporation Sdn Bhd, at paragraph [4].
2. Jack-In Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd, at paragraph [14]; Ireka Engineering & Construction Sdn Bhd v PWC Corporation Sdn Bhd, at paragraph [43].
3. Ibid, at paragraph [59]; Ibid, at paragraph [85].
4. Ibid, at paragraph [25]; Ibid, at paragraph [52].
5. Ibid, at paragraph [17]; Ibid, at paragraph [46].
6. Ibid, at paragraph [72]; Ibid, at paragraph [92].