Introduction

The Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) came into force on 15.04.2014. CIPAA’s objective can be gleaned from its preamble:-

“An Act to facilitate regular and timely payment, to provide a mechanism for speedy dispute resolution through adjudication, to provide remedies for the recovery of payment in the construction industry and to provide for connected and incidental matters.”

Since CIPAA came into force, numerous contractors, subcontractors and consultants resorted to adjudication as a mean of “speedy dispute resolution” for recovery of payments and consultant fees. However, does CIPAA apply to construction contract entered before the coming into force of CIPAA or is it confined to construction contract entered into after CIPAA? In other words, does it apply prospectively or retrospectively?

This question was the main issue before the Federal Court in the recently decided cases of Jack-in-Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd & Another Appeal [02(f)-58-07/2018(B) & 02(f)-59-07/2018(B)] (“Bauer”) and Ireka Engineering & Construction Sdn Bhd v PWC Corporation Sdn Bhd & Other Appeals [02(f)-124-12/2018(W), 02(f)-125-12/2018(W) & 02(f)-126-12/2018(W)] (“Ireka”).

Pre-Bauer / Ireka

On 05.12.2014, the High Court in the case of UDA Holdings Bhd v Bisraya Construction Sdn Bhd & Anor and Another Case [2015] 5 CLJ 527, found that CIPAA applies retrospectively and applies to construction contracts regardless of the date when such contracts are made:-

“[170] Similarly, these aspects are present in CIPAA and they are immensely important and one must not lose sight of what CIPAA essentially is – a choice of forum. That being so, and applying the well established principle that legislation providing for this change of forum in the form of an additional forum known as adjudication, retrospective in operation unless there is provision to the contrary, and there is none here, CIPAA is indeed retrospective. There are clear provisions to the contrary in the legislations of those jurisdictions that Parliament and now, this court looked at. The existence of those clear provisions to the contrary may be said to further confirm the opinion of this court on this point. CIPAA therefore applies to construction contracts regardless the date when such contracts were made. Obviously, the construction contracts in the two cases before the Court today come under the operation of the Act.”

[Emphasis added]

This was the position until the Court of Appeal case of Bauer (Malaysia) Sdn Bhd v Jack-In-Pile (M) Sdn Bhd & Another Appeal [2018] 10 CLJ 293 , where the Court of Appeal had on 22.02.2018, decided that CIPAA is prospective in nature and took “ a different view to the rationale expressed by the learned judge in UDA Holdings”:-

“[31] There is also a presumption when interpreting statutes and that is that Parliament will not take away the entrenched right of an individual retrospectively unless with clear words within the statute. As we are aware, there are no such clear words in CIPAA 2012. That being the case, there is no hesitation on our part to conclude that CIPAA 2012 is prospective in nature. In so far as s. 35 is concerned, cl. 11 of the construction contract remains afoot and valid.”

[Emphasis added]

Federal Court in Bauer & Ireka

Following the Court of Appeal’s decision in Bauer, Jack-In-Pile obtained leave to appeal to the Federal Court on the following questions of law:-

“(i)       Whether Construction Industry Payment and Adjudication Act 2012 (CIPAA 2012) applies to construction contracts entered into before the coming into operation of this Act, i.e. 15.4.2014.

 

 (ii)        If the answer to question (i) above is answered in the 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 i.e. 15.4.2014.”

On the other hand, the Applicant in Ireka’s cases (3 appeals) also obtained leave to appeal to the Federal Court on the following questions of law:-

“Whether CIPAA 2012 gives rise to substantive rights and its consequently not retrospective in nature, making the Adjudication Decision liable to be set aside”

[124 and 126 Appeals]

 

“Whether the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) which came into force on 15.4.2014 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?”

[125 Appeal]      

The appeals in Bauer and Ireka were heard together and the Federal Court delivered its decision in both matters on 16.10.2019 and found that the “provisions of the CIPAA undoubtedly affect the substantive rights of parties and such rights ought not be violated as it is of fundamental importance” to Bauer and Ireka “besides being an essential component of the rule of law”.

Thus, the Federal Court ruled that the entire CIPAA ought to be applied prospectively.

The Federal Court made the aforesaid finding based, amongst other, on the rule of construction that a statute should not interpreted retrospectively so as to impair an existing rights unless the language of the statute provides for such retrospective effect:-

“There is at common law a prima facie rule of construction that a statute should not be interpreted retrospectively so as to impair an existing right or obligation unless that result is unavoidable on the language used, or unless a contrary intention appears…”

The Federal Court also noted that the common law position is statutorily embodied in the Interpretation Acts (Act 388):-

“The provisions of Act 388 referred to above are indeed a manifestation of the common law position which is statutorily embodied in the said Act… As a general rule, a date of commencement of an Act, including the CIPAA, with retroactive operation is not allowed unless it is clearly intended by Parliament and such intention is evinced in the Act by express provisions in that behalf. It is particularly noteworthy and relevant that, from a perusal of the CIPAA, we cannot find an express provision from which we can safely say or infer that, Parliament has manifestly intended that the CIPAA shall operate retrospectively.”

 To better appreciate the judgment, it is pertinent to note that the construction contracts in both Bauer and Ireka were executed prior to the coming into force of CIPAA. Both Bauer and Ireka contended that by applying CIPAA retrospectively, their contractual rights which existed pre-CIPAA will be impaired.

In Bauer’s matter, clause 11.1 of the construction contract therein provides that:-

“11.0. Progress Payment

 

11.1. All payments shall be made within 7 days from the date the Specialist Contractor received their related progress payment and subjected to 5% retention. The subcontractor shall submit his claims with measurement records of work done including demarcated sketches and/or delivery orders (where applicable), duly endorsed by the Specialist/Main Contractor’s and Consultant’s authorized site staff. The cut-off date for the progress claim shall be on 20th day of each calendar month.” 

[Emphasis added]

The Federal Court finds that if CIPAA applies retrospectively, Bauer’s rights to make payment only after it receive payment from its employer will be impaired by application of section 35 of CIPAA, which renders conditional payment clause void:-

“…That being the position, the application of section 35 of the CIPAA to the agreement in the present circumstances would exclude and impair the respondent’s express rights under the agreement which is the right to pay the appellant only after they have received their related progress payments from the employer.”

On the other hand, the construction contracts in the Ireka matters clothed Ireka with the rights to multiple cross-contracts setoff:-

“13.1 Notwithstanding any other provisions in the Sub-Contract, the main contractor shall be entitled to deduct from or set-off any money due or becoming due to the Sub-Contractor (including any Retention Money) any sum or sums which the Sub-Contractor is liable to pay the Main Contractor whether under this Sub-Contract or otherwise or any other contract between the parties“.

[Emphasis added]

Similarly, the Federal Court finds that Ireka’s rights to cross-contracts setoff would be impaired if CIPAA applies retrospectively as section 5 of CIPAA only allows resolution of dispute under one construction contract:-

“…That being the position, the application of section 5 of the CIPAA to the agreement in the present circumstances would exclude and impair the appellant’s express rights under the agreement which is the right to multiple construction contracts vis-a-vis the cross-contract set-offs. Such construction would inflict a detriment on the appellant and have the effect of altering the construction contract in particular clause 13.1 in the sense that an act allowed at the time of doing it is now forbidden by a new statute namely the CIPAA. For these reasons, the express term of the agreement in clause 13.1 must prevail over any provision in the CIPAA, as this is an express term of the construction contract that was agreed upon by the parties well before the CIPAA was enacted by Parliament.”

With the above in mind, the Federal Court finds that CIPAA has various provisions that impacts party’s substantive rights, i.e. freedom to contract by adopting a “ ‘pay- when-paid’ clause which makes the obligation of the main contractor to pay a subcontractor conditional upon the main contractor having received payment from the principal” as in Bauer’s matters or “cross-contract set-offs as manifested in clause 11.1 of the agreement” in Ireka’s matters.

Having considered the above, the Federal Court reversed the position in UDA Holdings and upheld the decision of the Court of Appeal in Bauer by finding that the entire CIPAA applies prospectively for it “cannot be the case that some parts of the CIPAA have retrospective application whereas the other parts are held to have prospective application”.

Following the above, the Federal Court set aside both the adjudication decisions in Bauer and Ireka’s matters as the entire adjudication proceedings therein are rendered void by the finding that CIPAA applies prospectively.

“In the upshot, the entire adjudication proceedings including the adjudication decision are rendered void… the adjudication decision therefore ought to be set aside.”

Effect of Decision

The direct implication of the Federal Court case is clear; CIPAA only applies prospectively, i.e. on or after 15.04.2014 and does not apply to construction contract executed before 15.04.2014. However, the wider implication does not appear to be clear.

As the Federal Court ruled that the entire CIPAA applies prospectively, the finding thereby resulted in the entire adjudication proceedings and decisions in both Bauer and Ireka to be void.

Following the same logic, are previous adjudication decisions relating to construction contracts entered into before 15.04.2014 automatically voided as well? Are such adjudication decisions liable to be set aside? What if parties had acted upon such decisions and consequently made payment? Can the payments now be recovered?

The answer to these questions depends on whether the Federal Court decisions in Bauer and Ireka themselves have retrospective application or will they only apply prospectively to pending and future adjudications.

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