CASE UPDATE: Conditional Payment Provision Shall Be Interpreted Widely and Shall Be Void under Section 35 of CIPAA if It Inhibits Cash Flow

Econpile (M) Sdn Bhd v IRDK Ventures Sdn Bhd and anor [2017] 7 MLJ 732

In this case, the construction contract is based on PAM Building Contract (With Quantities) 2006 edition (PAM Contract).

The Contractor mounted a CIPAA Claim against the Employer for the outstanding payment arising from payment certificate and progress claim.

In response, the Employer contended that it was not bound to make payment for progress claim as the Contractor had been terminated under Clause 25 of PAM Contract. Pursuant to Clause 25.4(d) of PAM Contract, the payment would be postponed until the final account are concluded and the works completed.

Clause 25.4(d) of PAM Contract:

“Until after the completion of the Works under Clause 25.4(a), the Employer shall not be bound by any provision in the Contract to make any further payment to the Contractor, including payments which have been certified but not yet paid when the employment of the Contractor was determined. Upon completion of the Works, an account taking into consideration the value of works carried out by the Contractor and all cost incurred by the Employer to complete the Works including loss and/or expense suffered by the Employer shall be incorporated in a final account prepared in accordance with Clause 25.6”

High Court Decision

Under Section 35 of CIPAA, any conditional payment provision in a construction contract is void. Section 35 further provides 2 instances of conditional payment provision:

Section 35

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

(2) For the purpose of this section, it is a conditional payment provision when:

(a)The obligation of one party to make payment is conditional upon that party having received payment from a third party; or

(b)The obligation of one party to make payment is conditional upon the availability of funds or drawdown of financing facilities of that party.

Of relevance, the High Court held that an expansive interpretation should be accorded to the meaning of Section 35 and the conditional payment provision is not limited to the 2 instances prescribed in Section 35(2).

In this case, the High Court opined that Clause 25.4(d) of the PAM Standard Form of Contract has the effect of, upon the termination of the contract, imposing condition of postponing payment until the final accounts are concluded and the works completed.

Therefore, such a clause is void and unenforceable under Section 35 and the adjudicator may disregard it altogether.

Significance

It is the common understanding amongst the legal and construction practitioner that pay-if-paid and back-to-back clause has been rendered void foir the purpose of CIPAA pursuant to Section 35 of CIPAA.

With the High Court’s decision, it appears that not only the pay-if-paid or back-to-back clause will be rendered invalid for the purpose of CIPAA Adjudication pursuant to Section 35, but ALL contractual provisions which has the effect of imposing a condition upon payment.

Such ‘condition’ may come in various forms and as long as the ‘condition’ has the effect of inhibits cash flow, then it shall be void under Section 35.

***Update:

BM City Realty & Construction Sdn Bhd v Merger Insight (M) Sdn Bhd and another case [2016] MLJU 1567

Similar issue arises in this case and the High Court had once again confirmed the above preposition.

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