- What is CIPAA 2012 – Construction Industry Payment and Adjudication 2012?
- Why CIPAA 2012? The Advantages and Benefits of CIPAA
- How to launch CIPAA Claim: Requirement of CIPAA
- CIPAA Procedure & Timeline of CIPAA Process
- Cost of CIPAA & Adjudication Fee
- Enforcement of CIPAA Adjudication Decision
This article aims to provide a full and comprehensive guide to the Malaysia CIPAA (Construction Industry Payment and Adjudication Act 2012) Adjudication Proceeding.
In this article, we will address the WHAT, WHY, and HOW of CIPAA.
What is CIPAA 2012 – Construction Industry Payment and Adjudication 2012?
CIPAA is a legislation enacted by the Parliament of Malaysia on 15.04.2014 which aims to facilitate timely payment and alleviate the cash flow in the construction industry by the introduction of “CIPAA Adjudication Proceeding”.
In the CIPAA Adjudication Proceeding, an “adjudicator” (similar to a judge in court proceeding / arbitrator in arbitration) will be appointed to decide on the parties’ dispute and to deliver the Adjudication Decision.
Why CIPAA 2012? The Advantages and Benefits of CIPAA
Speedy and Expeditious
CIPAA only takes about 80 – 95 working days to complete from its initiation until the delivery of the Adjudication Decision.
In comparison, a construction dispute could typically take up to 9 months – 18 months to complete in arbitration / court proceeding.
High Success Rate
The Claimant has extremely high success rate under the CIPAA regime. In 2017, AIAC recorded that a whooping 89.28% of the adjudication decision is rendered in favour of the Claimant.
No-Lose Situation: No positive counterclaim from the Respondent
The Claimant is in a “NO-LOSE” situation in a CIPAA Adjudication Proceeding.
The Respondent may only raise a cross-claim / counterclaim against the Claimant to ‘zerorise’ the CIPAA claim.
The High Court has confirmed that the Respondent is unable to obtain a positive award against the Claimant even if the Respondent’s cross-claim / counterclaim is greater than the Claimant’s claim.
Pay Now, Argue Later
There is no avenue to appeal against the CIPAA Adjudication Decision.
The CIPAA Adjudication Decision is legally binding on the Losing Party and the Losing Party will have to “pay first” in accordance with the Adjudication Decision and “argued later” by way of court litigation or arbitration proceeding.
Conditional Payment Clause / Back-to-Back Payment Clause is void
Pursuant to Section 35 of CIPAA, any “conditional payment clause” in the construction contract is void in the CIPAA Adjudication Proceeding.
As such, the Respondent will not be able to use the “conditional payment clause” such as “pay-when-paid”, “back-to-back” clause as a defence against the CIPAA claim.
- CASE UPDATE: Conditional Payment Clause is Void Only for the Purpose of CIPAA Proceeding
- CASE UPDATE: Conditional Payment Provision Shall Be Interpreted Widely and Shall Be Void under Section 35 of CIPAA if It Inhibits Cash Flow
How to launch CIPAA Claim: Requirement of CIPAA
1. There must be a Written Contract
Pursuant to Section 2 of CIPAA, CIPAA only applies if there is a “Written Contract”.
However, the contract needs NOT be a formal contract or signed contract.
The meaning of “written contract” is construed very loosely and includes letters, correspondences and even purchase orders (PO) and delivery order (DO) as per the guideline issued by the CIPAA’s administrative center, Asian International Arbitration Centre (AIAC).
2. There must be a Construction Contract
The Contract must relate to Construction Work or Construction Consultancy.
This includes any work which forms an integral part of, or are preparatory to or temporary for such works, including site clearance, soil investigation and improvement, earth-moving, excavation, laying of foundation, site restoration and landscaping.
It also includes the procurement of construction materials, equipment or workers.
3. The contract must be executed after 15.04.2014
CIPAA applies prospectively to only Written Construction Contract that was executed AFTER the enforcement of CIPAA, 15 April 2014.
4. The Construction Contract must relate to construction work carried out within wholly or partly in Malaysia.
CIPAA only applies to construction work or construction consultancy work that is carried out within Malaysia.
CIPAA Procedure & Timeline of CIPAA Process
CIPAA Proceeding is typically conducted by way of “paper hearing” and can be summarily divided into 2 stages:
- Claim Stages
- Adjudication Stages
At the claim stage, the contractor / consultant will be known as “unpaid party” and the employer will be known as the “non-paying party”.
1. Payment Claim (Form 1)
At the outset, the Unpaid Party will initiate CIPAA Proceeding by sending the ‘Payment Claim’ (Form 1) to the Non-Paying Party.
Pursuant to Section 5 of CIPAA, the Payment Claim shall entail the amount claimed, due date for payment, details of the claims, descriptions of the work or services.
2. Payment Response (Form 2)
Following the receipt of Payment Claim, the Non-Paying Party has 10 working days to reply by way of ‘Payment Response’ pursuant to Section 6 of CIPAA.
In the Payment Response, the Non-Paying Party shall state the amount admitted or disputed and the reasons of disputing.
If the Non-Party fails to reply by Payment Response, the entire Payment Claim shall be deemed to be disputed.
If the Non-Paying Party did not reply to the Payment Claim (Form 1) / denied the Unpaid Party’s claim, the Unpaid Party shall then initiate the Adjudication Stage.
In the Adjudication Stage, an Adjudicator will be appointed to decide on the parties’ dispute and to deliver the Written Adjudication Decision within the stipulated timeline.
At this stage, the Unpaid Party will be known as “Claimant” and the Non-Paying Party will be known as “Respondent“.
3. Notice of Adjudication (Form 3)
The Unpaid Party may initiate the adjudication by way of Notice of Adjudication (Form 3) pursuant to Section 8 of CIPAA.
Procedurally, the Unpaid Party will have to submit both the Notice of Adjudication and the Notice to Register the Adjudication to the AIAC, and AIAC will proceed to assign an adjudication number to the dispute.
4. Appointment of adjudicator
Thereafter, an Adjudicator will be appointed to decide on the payment dispute.
The Adjudicator may either be appointed by mutual agreement or by the Director of AIAC if the parties fail to reach a consensus.
5. Adjudication Claim (Form 7)
Upon the acceptance of appointment by the Adjudicator, the Claimant shall serve and file the “Adjudication Claim” on the Respondent within 10 working days from the date of acceptance of appointment.
The Adjudication Claim shall clearly outline the nature and the description of the dispute, the remedy sought thereunder and enclose the supporting documents.
The Adjudication Claim shall also include the legal reasoning (authorities / case laws) and expert report (if necessary).
6. Adjudication Response (Form 8)
Upon the receipt of Adjudication Claim, the Respondent shall respond to the Adjudication Claim “Adjudication Response” within 10 working days.
Similarly, the Adjudication Response shall contain the detailed /defence, counterclaim(s) and/or set-off together with supporting documents.
7. Adjudication Reply (Form 9)
The Claimant may serve its Adjudication Reply within 5 working days from the receipt of Adjudication Claim.
Upon the receipt of Adjudication Response, the Claimant has a final opportunity to reply to the Respondent’s Adjudication Response within 5 working days.
Lastly, the Adjudicator will deliver the Adjudication Decision within 45 working days from the service of Adjudication Response / Adjudication Reply, whichever is later.
Cost of CIPAA & Adjudication Fee
Ordinarily, there are usually 3 types of costs incurable in a CIPAA Proceedings:
The parties will have to pay for the Adjudicator’s Fee in CIPAA Adjudication Proceeding.
The Adjudicator will invite both parties to deposit 50% of the Adjudicator’s Fee and Administrative Fee at equal shares to the AIAC. If the Respondent fails to make payment, the Adjudicator will proceed to invite the Claimant to deposit the remaining 50% of the Adjudicator’s Fee and Administrative Fee to AIAC.
If Adjudicator’s Fee is not fully paid, the Adjudicator is entitled to withhold the Adjudication Decision until and unless the full payment is deposited with the Director of AIAC.
The Adjudicator’s Standard Fee calculator is as below:
Over and above the Adjudicator’s Fee, the parties will also have to pay the Administrative Fee to the AIAC.
The Administrative Fee payable is calculated at 20% of the Adjudicator’s Fee pursuant to Schedule III of the AIAC Adjudication Rules & Procedure.
Recovery of Cost
The costs incurred in CIPAA Adjudication Proceeding such as Adjudicator’s Fee, Administrative Fee and Legal Fee/ Consultant Fee are recoverable in the event that the Claimant success in its claim.
In simple words, this mean that the losing party will have to pay costs to the wining party.
Enforcement of CIPAA Adjudication Decision
Following the issuance of CIPAA Adjudication Decision, if the Losing Party refuses to pay the Adjudicated Sum to the Winning Party, the Winning Party may consider enforcing the Adjudication Decision by the following methods:-
Section 28: Enforcement of Adjudication as Judgment
One of the method to enforce an Adjudication Decision is to file an enforcement application in the High Court.
Upon the granting of the High Court Order, the Winning Party may proceed to execute the Adjudication Decision using the available execution process under the Rules of Court 2012 by either:
- seizing and selling the property of the losing party by way of Writ of Seizure and Sale;
- Garnishing the money from the losing party’s Bank or other losing party’s debtor by way of Garnishee Proceeding;
- Issuing Judgment Debtor Summons;
Section 29: Suspension or Reduction of Rate of Progress of Performance
Alternatively, if the construction work is still underway and incomplete, the Winning Party may suspend or slow down the performance of its work if the Losing Party fails to honour the Adjudication Decision.
In such circumstance, the suspension or slowing down of work will not be seen as a breach of contract and the Winning Party is even entitled for extension of time and to recover any loss and expense incurred arising from the suspension or slowing down of work.
Often time, the suspension or slowing down of work will exert a great deal of pressure to the Losing Party to pay the Adjudicated Sum as the Losing Party may potentially face the exposure of having to pay liquidated ascertained damages/ delay damages (LAD) to the Employer or the end purchasers (in the case of developer).
Section 30: Direct Payment by Principal
The Winning Party may also enforce the CIPAA Adjudication Decision by seeking direct payment from the Principal of the Losing Party pursuant to Section 30 of CIPAA.
By operation of Section 30 CIPAA, the Principal MUST make direct payment to the winning party if there is money due or payable by the Principal to the losing party notwithstanding that there is no privity of contract between the principal and the winning party.
Winding Up Proceeding
Lastly, the Winning Party may also issue a Statutory Demand pursuant to Section 466 of Company Act 2016 (Statutory Demand) to the Losing Party based on the Adjudication Decision.
If the Losing Party fails to meet the statutory demand and make payment thereof within 21 days, the Winning Party may proceed to wind up the Losing Party’s company and liquidate its asset to pay the Adjudicated Sum.