The construction industry is the most essential part of a country’s economy. It is also a fertile ground for many disputes. Delay in payments of construction projects hinders the potential economic growth. The withheld payments result in over-run of cost, time, etc. This further generates an increased number of litigations in the courts, eventually adding more cost and time to the projects.
Malaysia has a long history of payment disputes in the construction industry. In Malaysia, approximately 50% of construction project experience under Payment or late payment or non-payment issues. This leads to a delay in the completion of construction projects or altogether abandonment of projects in some cases.
To address such problems, the Government of Malaysia passed a model law in parliament known as the Construction Industry Payment and Adjudication Act, 2012 (CIPAA).
What is CIPAA?
The Construction Industry Payment and Adjucation Act is abbreviated as CIPAA.
The Malaysian government came out with construction law in 2012 known as construction industry payment and adjudication act, 2012 (CIPAA) which was enforced in April 2014. This act is drafted to provide speedy, timely and cost-effective resolutions for disputes in construction payments.
This act has support from relevant construction industry like Master Builders Association Malaysia (MBAB), PAM, BEM, construction industry development (CIDB), IEM to provide smooth and affordable enforcement of this act.
CIPAA also specifies its applicability and non-applicability under its adjudication.
- Application: The Act applies to all construction contracts wherein written agreements are made to carry out projects wholly or partly in the territory of Malaysia whether the contract is entered with government or a private party.
- Non-Application: The Act does not apply to any construction contract in respect of any building which is less than four storeys high entered into by a natural person which is wholly intended for his occupation.
Since the Act is confined to payment resolution, so disputes arising out of services rendered, for work done or material supplied under a written contract shall be covered by CIPAA. Here, the “construction contract” term includes both construction work contract and consultancy contract.
CIPAA process flow chart
The Government of Malaysia realized the resolution problems faced by parties to a construction contract in securing regular and timely payment. So to ensure smooth implementation of construction projects, the government came out with a construction law at the onset of the 10th Malaysia plan.
Many consultative forums were held to ensure that all the needs of the stakeholders were addressed. The industry stakeholders mandated CIDB to embark on the development of CIPAA. The aim is to provide benefits of this act to the relevant stakeholders and also to initiate smooth implementation of construction projects.
Briefly, CIPAA is a new regime under which an unpaid party can claim for payment for work done or services rendered under the terms of a written construction contract. It was introduced to provide a speedy procedure for the temporary resolution of payment disputes in construction contracts. With such an objective in mind, this act has invalidated the conditional payment clause in the construction contract in adjudications brought under CIPAA, mainly to ease the cash flow issue in the construction industry.
The following infographic depicts the complete process of the CIPA Act.
Figure: Infographic depicting CIPAA flow process.
How CIPAA will help resolve cash disputes faced by contractors?
Through this construction act, quick relief is provided to the contractors where the main issues of the dispute are resolved through arbitration or litigation. The act introduces statutory adjudication as a quick process to mitigate payment disputes between employers and contractors.
- CIPAA helps alleviate cash flow issues faced by many contracting parties who are unpaid as it is quick and cost-effective. To ensure that the provisions of this act are not circumvented, it renders all back to back payment arrangements to be void.
- The decision made under CIPAA is immediately binding.
- The decision made under this act can be enforced by the winning party by applying to register it in the High Court. This step does lead to any penalty for the winning party.
- The winning party can seek payment from the principal if there is any amount owing (applicable to sub-contractors seeking direct payments from employers).
Implications of CIPAA
- Speedy: Adjudication Award will be obtained within 95 working days.
- No hefty fees: Cheapest among Litigation and Arbitration.
- Effective: Adjudication up until 2016 hits and 1.4billion Ringgit Malaysia. This shows the confident construction industry players have towards CIPAA 2012.
The CIPA Act has helped in improving the cash flows and payment behavior in the construction industry in Malaysia. Hence, it has proved to be beneficial in strengthening the construction industry environment in Malaysia.
With such measures, it will help improve Malaysia’s ranking in the ease of doing business index brought out by the World Bank. A good rank in such indices promotes investment in the country by boosting investors’ confidence in the economy.
Whether CIPAA retrospective or prospective?
The question of whether CIPAA applies retrospectively or prospectively pertains to section 35 of the act.
- This construction act is applicable retrospectively. It is merely procedural as it does not affect substantive rights under the construction contract and therefore, is applicable retrospectively.
- In the UDA HOLDINGS BHD Vs BISRAYA CONSTRUCTION SDN BHD case and CAPITAL AVENUE DEVELOPMENT SDN BHD Vs BAUER (M) SDN BHD case, the high court had determined that CIPAA 2012 was intended to apply retrospectively.
- The High Court in arriving at its decision in Bauer (Malaysia) Sdn Bhd Vs Jack in Pile (M) Sdn Bhd case Stated that the act is prospective. It clarified that unless there are clear words in the legislation to the contrary, any legislation affecting Substantive rights must be of prospective effect.
- CIPAA only settles payment disputes on a provisional, interim basis. It would still affect substantive rights as it allows a party to recover payment under a construction contract faster than it would otherwise have been under the pre-existing laws.
CIPAA 2012 identifies construction contracts that encompass both construction work contracts and consultancy services contracts. It, therefore, affects both local and international contracts that fall within the ambit of the Act.
The Asian International Arbitration Centre (AIAC) reported that 244 cases have been recorded in the first quarter of the year 2018. In the year 2017, 704 adjudication matters were registered, an increase from 447 cases registered in the year 2016.
This shows that the CIPAA 2012 effectively works and payment disputes can be resolved as quickly as possible through fast and uncomplicated adjudication proceedings.
Countries that have similar laws:
THE UNITED KINGDOM (1998)
NEW SOUTH WALES, AUSTRALIA (1999)
NEW ZEALAND (2002)
- The act applies equally to the government of Malaysia as well as private players.
- The adjudication under CIPAA can only be made for disputes relating to payment for work done and services rendered under the terms of a written construction contract.
- However, the contracting parties may agree after the appointment of the adjudicator to extend the jurisdiction to decide on any other matter arising from the construction contract.
- CIPAA applies to every construction contract made in writing for construction work carried out in the territory of Malaysia including a construction contract entered into by the government.
- The act does not apply to an individual owner, that is, resident who erects not more than 4 stories high building with the intention for his own occupation.
- It defines ‘construction contract’ that includes construction work contract and Consultancy Services contracts.
- It applies to only those contracts which are made ‘in writing’. But it does not define or elaborate as to what constitutes construction contract made in writing.
- AIAC considers Construction contract that is made in writing as –
- a contract made in writing whether or not signed by the parties;
- a contract made by exchange of communications in writing; or
- a contract which is evidenced in writing
The construction industry payment and adjudication act can be seen as a zero-sum game for contractors and consultants.
The Construction Act of Malaysia aims to address the cash flow problems faced by contractors in the construction industry. The CIPAA comes into a picture wherein the dispute arises between contracting parties out of delayed payment, under-payment or outrightly non-payment made for their works.
Before CIPAA, disputes arising out of construction projects had to go through lengthy arbitration or litigation process. This further constrained the cash flow and business operations while the disputing parties waited for the resolution.
With CIPAA, the Parliament introduced an interim dispute resolution mechanism. It is a rather summary, efficient and quick procedure for resolving payment disputes by way of arbitration or litigation. This measure of the government of Malaysia proved to be a step in the right direction in resolving the disputes of the construction industry.
All in all, CIPAA is viewed as a substantial help for all contractors who have previously faced difficulty in collecting their payments. This will further help in boosting the economic development of Malaysia and further strengthening the employment ecosystem of the country.