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 litigation and arbitration cases, eventually adding more costs to all parties involved.
Malaysia has a long history of payment disputes in the construction industry. In Malaysia, approximately 50% of construction projects 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 law in parliament known as the Construction Industry Payment and Adjudication Act, 2012 (CIPAA).
What is CIPAA?
The Construction Industry Payment and Adjudication Act is abbreviated as CIPAA.
The Malaysian government came out with an Act in 2012 known as the 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 dispute resolution mechanism for payment disputes in the construction industry.
This Act has the support from relevant construction industry players like the Master Builders Association Malaysia (MBAM), PAM, BEM, Construction Industry Development Board (CIDB), IEM and the like.
CIPAA clearly sets out the applicability and non-applicability of payment disputes for 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 the 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.
The term “construction contract” includes both a construction work contract as well as a consultancy contract, therefore all disputes arising out of non-payment for works done, services rendered or materials supplied under a written construction contract would be covered by CIPAA.
CIPAA process flow chart
The Government of Malaysia realised the cashflow issues affecting contractors who had difficulty to resolve payment disputes. These disputes have to be quickly resolved in a cost-effective manner to ensure the smooth execution of the construction projects. Therefore, CIPAA was brought into play.
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 was to provide benefits of this Act to the relevant stakeholders and also to ensure 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 prevalent in construction contracts previously, in order to ease the cash flow issue faced by contractors in the construction industry.
The following infographic by CIDB depicts the complete adjudication process under CIPAA.
Figure: Infographic depicting CIPAA flow process.
How CIPAA will help resolve cashflow issues arising from payment disputes faced by contractors?
Through CIPAA, quick relief of cashflow is provided to contractors whilst more substantive issues of dispute may be resolved subsequently vide arbitration or litigation. The Act introduces statutory adjudication as a quick process to mitigate payment disputes between employers and contractors, as well as between contractors and sub-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.
- The winning party can also seek payment from the principal if there is any amount owing (applicable to sub-contractors seeking direct payments from employers).
- Furthermore, the winning party may suspend or slow down the rate of progress of works without facing any penalty, instead it would be entitled to extension of time as well as loss and expense.
Implications of CIPAA
- Speedy: Adjudication Decision will be obtained within 106 working days.
- No hefty fees: Cheaper than Litigation or Arbitration.
- Effective: Adjudication up until 2016 hits RM1.4 billion. This shows the confidence that construction industry players have towards CIPAA 2012.
CIPAA has clearly helped in improving the cash flow and regulating payment behaviour in the construction industry in Malaysia. It has therefore proved to be beneficial in strengthening the construction industry environment in Malaysia.
With CIPAA, it is hoped that Malaysia’s ranking in the ease of doing business index by the World Bank would also improve. 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 has been resolved by the Federal Court. CIPAA only applies prospectively.
CIPAA 2012 identifies construction contracts that encompass both construction work contracts and consultancy services contracts. It affects all construction contracts (including contracts involving international parties) as long as some part of the work is carried out in Malaysia.
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, services rendered or materials supplied 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 wholly or partly in the territory of Malaysia including a construction contract entered into by the government.
- The Act does not apply to an individual owner who erects not more than a 4-storey high building with the intention for his own occupation.
- It defines ‘construction contract’ to include construction work contract and consultancy services contracts.
- It applies only to contracts which are made ‘in writing’, although CIPAA itself does not define what constitutes a contract made in writing. AIAC has issued guidelines to define the same.
- AIAC considers a construction contract to be made in writing if –
- a contract is made in writing whether or not signed by the parties;
- a contract is made by exchange of communications in writing; or
- a contract is evidenced in writing.
Under CIPAA, a contractor who faces a substantial counterclaim would still, in the worst case scenario, have his claim zero-rised. He can never be asked to pay to the employer except for costs. Therefore, CIPAA can be seen as a zero-risk game for contractors and consultants seeking payment.
The Construction Industry Payment and Adjudication Act of Malaysia aims to address the cash flow problems faced by contractors in the construction industry. CIPAA comes into the picture when a dispute arises between contracting parties out of delayed payment, under-payment or outright non-payment for their works, services or materials.
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. All the more so when the contract may at times prohibit a contractor from commencing any arbitration until the works under the contract are completed.
With CIPAA, Parliament had introduced an interim dispute resolution mechanism. It is a rather summary, efficient and quick procedure for resolving payment disputes as compared to arbitration or litigation. This measure has proven to be a step in the right direction in resolving the payment 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 strengthening the economic ecosystem of the country.