Enforcing conditional payment clauses post-CIPAA

The Federal Court in Ireka Engineering & Construction Sdn Bhd v PWC Corp Sdn Bhd And Other Appeals [2020] 1 MLJ 311 made it clear that CIPAA applied only prospectively and not retrospectively because it impacted substantive rights. One of the sections in CIPAA said to affect substantive rights is s.35 CIPAA which prohibited conditional payments (i.e. pay-if-paid and pay-when-paid clauses).

However, the reality is that employers continue to insist on making direct payments to nominated sub-contractors (NSCs) and by virtue of such direct payment arrangements, it becomes a given that the NSCs are paid only when the employers choose to pay.

For subcontractors, the issue is clear-cut. Since conditional payments are prohibited by CIPAA, subcontractors can willy-nilly sign any contract imposing conditional payment terms because they can rest assured that such payment terms are void. Therefore, at the end of the day, the main contractors still have to make payment based on default payment terms under s.36 CIPAA if the employers do not pay.

For employers, the issue is also clear-cut. Notwithstanding any direct payment arrangements, the fact is that there is no privity of contract between employers and subcontractors. Therefore, there is usually no legal possibility for subcontractors to sue employers direct, although a few cases successfully did so on non-contractual grounds like unjust enrichment and promissory estoppel.

However, for main contractors, the issue is not so simple. As the employers insist on making direct payment, the main contractor therefore relies on the employer’s payment to pay the subcontractor. However, any default on the part of the employer would fall on the head of the main contractor, not the employer. Therein lies the challenge for the main contractor.

Here are three possible ways that may overcome this difficulty:

  • Enter into a tripartite agreement among the employer, the main contractor and the NSC instead of the usual subcontract. In this way, the main contractor overcomes the challenge of there being no privity of contract between the employer and the subcontractor.
  • Make it expressly clear in both the main contract and the subcontract that the “paying party” is the employer. In the subcontract, reference should also be made to the same payment term in the main contract. If the subcontractor has agreed that the employer is the “paying party”, then adversely it may be argued that in the event of any default of payment, then surely it is the employer who would be the “non-paying party” under CIPAA.
  • Insert a term in the subcontract to state that in the event of failure on the part of the employer to pay, then the subcontractor will give notice to the main contractor and require the main contractor to initiate adjudication proceedings against the employer, and the subcontractor will be bound by any decision in those adjudication proceedings. Whilst technically it does not stop the subcontractor from mounting a CIPAA claim, it is nevertheless a risk-mitigation measure on the part of the main contractor.

Of course, the best case scenario is for the main contractor to retain the responsibility to pay the subcontractor, and not allow a direct payment arrangement. With the control of the purse-strings, the main contractor may be better-positioned to ensure that the subcontractor carries out its works accordingly. Otherwise, the main contractor ends up in the position of having all the responsibilities, with no accompanying rights.

CIPAA is intended to help contractors with their cashflow. If you need a preliminary assessment of your claim or defence, email us at [email protected].