Malaysian Construction Industry Payment and Adjudication Act 2012
Introduction
Malaysia, like many countries, has been haunted by a construction industry rife with payment delays, non-payment issues and solvency risks. To address these problems, the Government of Malaysia introduced a security of payments regime in the Malaysian Construction Industry Payment and Adjudication Act 2012 (CIPAA). The CIPAA was modelled on the UK and Australian adjudication regimes with some tailoring to suit Malaysia's unique market and legal conditions.
What statutes govern the payment regime?
The CIPAA received royal assent on the 18 June 2012.1 To support the statutory regime, two construction courts were established: one within the High Court of Kuala Lumpur and the other in the High Court of Shah Alam. Both were established on 1 April 2013.2
On 15 April 2014, the CIPAA came into force when the Construction Industry Payment and Adjudication Regulations 2014 (Regulations) and Construction Industry Payment and Adjudication (Exemption) Order 2014 (Exemption Order) were passed.3 The Regulations outline rules for adjudication under the CIPAA. The Exemption Order exempts the Malaysian Government from CIPAA's operation.
What is the effect of this legislation?
CIPAA’s primary function is to enable efficient, quick dispute resolution for payment disputes through the forum of adjudication.4 The adjudication process applies to written construction contracts where the construction work is carried out wholly or partly within Malaysia. Adjudication operates distinctly from any resolution process contained in a construction contract. Parties cannot contract out of the CIPAA.5
To what type of contract does the payment regime apply?
CIPAA applies to construction contracts made in writing, carried out wholly or partly in Malaysia.6 Construction work is broadly defined. It includes construction, extension, installation, repair, maintenance, removal, renovation, alteration, and demolition in relation to infrastructure and specialist work (electrical, mechanical, oil and gas, petrochemical and telecommunication). It also includes procuring materials, equipment or workers for construction.7
Some construction contracts are excluded by CIPAA. For example, buildings less than four floors high and intended for occupation by a "natural person"8, as well as some contracts where the counterparty is the Malaysian Government are excluded.9
Although CIPAA applies only to written contracts, this includes contracts not signed by the parties. The agreement must merely be communicated in writing or evidenced in writing.10 The CIPAA does not cover contracts that are wholly or partly oral.11
The CIPAA also applies to construction consultancy contracts. This includes services in relation to construction work such as planning and feasibility study, architectural work, engineering, surveying, exterior and interior decoration, landscaping and project management surveying.12
What types of dispute can be referred to adjudication?
Payment disputes, by default, fall within the ambit of CIPAA.13 Whilst the term "payment dispute" is not defined in CIPAA, the legislation defines "payment" as "a payment for work done or services rendered under the express terms of a construction contract."14 Broader breach of contract claims (such as damages claims) and common law torts claims fall outside the scope of the definition. The definition is nevertheless broad enough to cover disputes about progress payments, final accounts, variations, loss and expense claims, and liquidated damages.
In addition to dealing with payment disputes through adjudication, the parties to a construction contract can broaden the regime's application to other forms of dispute. Under s 27(2) of CIPAA, the parties can agree in writing to extend the adjudicator's jurisdiction to matters beyond the scope of the payment dispute. This allows the CIPAA adjudication process to become a more holistic form of dispute resolution.
What is the format of an adjudication?
An adjudication under CIPAA has two phases. Phase one requires the claimant to serve a payment claim. In turn they will receive a payment response from the respondent. Once the first stage is satisfied, the matter can be referred to adjudication. A more detailed outline follows.
Phase 1: The payment claim process
The claimant starts the adjudication process by delivering a written payment claim to the respondent. The payment claim must satisfy the requirements outlined in CIPAA s 5. The respondent has 10 working days to either admit to the claim in its totality, admit to the claim in-part, challenge the claim in totality, or challenge the claim in-part.15 If the respondent admits the claim in part or completely, it must simultaneously issue the response and payment of the admitted portion.16 The response must include reasons for any challenge.17 If the payment response is not in the form prescribed by the CIPAA, it is deemed to be a dispute of the totality of the claim.18
After the lapse of 10 days from service of the payment claim, either party can seek adjudication.19 The claimant must issue a notice including the nature of the claim, the dispute at hand and the remedy sought with any supporting evidence.20
Phase 2: The adjudication
Once a notice has been issued, the appointment process for an adjudicator begins. The parties can agree on an adjudicator or it can be a decision made by the Director of the Asian International Arbitration Centre (AIAC).
Once an adjudicator is selected, the claimant has 10 working days to issue an adjudication claim to the respondent.21 This claim should be an expansion of the payment claim and not introduce new matters.
Upon receipt, the respondent has 10 working days to issue a response.22 Whilst s 27(1) of CIPAA notes that an adjudicator’s jurisdiction is confined to the matters set out in the claim and response, the Federal Court determined that an adjudicator has jurisdiction to consider new matters raised by the respondent as long as they are related to the payment claim.23 This allows for cross-claims and new defences to be raised by the respondent in the response.
The claimant then has 5 working days to submit a reply to the response.24
The adjudicator has 45 working days from the service of the reply (or response if that is the last document) to make a decision.25
How are adjudicator’s decisions enforced?
The successful party may apply to the High Court under s 28(1) of CIPAA for an order to enforce the adjudication decision. The successful party is also empowered under the legislation to suspend their performance or reduce their rate of performance of the contract.26 CIPAA also allows a subcontractor to request payment directly from the principal in instances where they are a subcontractor.27 Principals receiving said notices are legally obligated to pay subcontractors even if they were not a party to the adjudication proceedings.
An adjudicator's decision is binding on the parties28 unless it is set aside by the High Court29, the payment dispute is settled in writing or the dispute is finally decided by an arbitrator or court.30 The grounds on which a decision can be set aside by the High Court are contained within s 15 of CIPAA. Setting aside an adjudication returns the parties to their pre-adjudication position.31 The matter can then be litigated, arbitrated or if res judicata does not apply32, re-adjudicated. A party applying to set aside a decision pursuant to CIPAA may also apply for a stay of enforcement.33
What impact has the payment regime had on Malaysia's construction industry?
Malaysia's experience mirrors that of other jurisdictions that have adopted a statutory adjudication regime – the overall experience has been positive. A 2023 survey of contractors in Selangor showed the majority considered CIPAA to be an effective method for resolving payment disputes.34 Speed and cost were the main benefits, especially when compared to arbitration and litigation. However, the suspension and slow-down rights for non-payment was problematic because a contractor's workforce and subcontractors still expected prompt payment.
What reforms do you expect to the regime?
The CIPAA was amended in mid-2024 to reflect the amendments made to the Arbitration Act that give effect to structural changes to the Asian International Arbitration Centre. No other reforms are imminent.
