CASE UPDATE: Conditional Payment Clause is Void Only for the Purpose of CIPAA Proceeding

Bond M&E (KL) Sdn Bhd v Isyoda (M) Sdn Bhd (Brampton Holdings Sdn Bhd, third party) [2017] MLJU 376

In this case, the Subcontractor sued the Main Contractor for the recovery of payment for work done.

The construction contract contains a back-to-back payment clause which stipulates that:-

“2.0 Payment Terms

Progress payments will be made to the sub-contractor within fourteen (14) days upon receipt of the same from the client …”

               (Back-to-Back Payment Clause)

Premised on the above, the Main Contractor sought to rely on the Back-to-Back Payment Clause to avoid the liability to pay. In response, the Subcontractor argued that the Back-to-Back Payment Clause is a conditional payment clause which falls foul of Section 35 of CIPAA which provides that:

Section 35 of CIPAA 2012

(1) Any conditional payment provision in a construction contract in relation to payment under construction contract is void.

Decision of High Court

The High Court held that Section 35 is only applicable in an adjudication proceeding. In other words, the conditional payment clause is only void for the purposes of adjudication. The prohibition is not of general application in the construction industry.

Significance

As a result of the High Court decision, the conditional payment clause is not void perpetually but merely suspended during the CIPAA Adjudication Proceeding.

The conditional payment clause could still be revived when the dispute is finally determined in arbitration or litigation.

Having said the above, it does not mean that Section 35 of CIPAA has been rendered useless.

In the circumstance where the contractor is unable to recover payment as the construction contract contains a conditional payment clause such as pay-if-paid or back-to-back payment clause, the cash-strapped contractor may still resort to CIPAA proceeding to alleviate its cash flow.

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