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Failure to Plead the Relevant Contractual Clause in Adjudication Proceedings (CIPAA 2012) is Fatal

posted 2 months ago

Anas Construction Sdn Bhd v JKP Sdn Bhd & Another Appeal  [2024] MLJU 53; [2024] CLJU 63; (Civil Appeal No.: 02(f)-4-01-2023(P) (Federal Court)

This recent Federal Court decision confirms the position that an Adjudicator can only decide on the cause of action (provisions in the contract) that have been specifically referred to him/her pursuant to the Payment Claim. The Court held that the Adjudicator had exceeded his jurisdiction by referring to another provision in the contract that has not been referred by the claimant in the Payment Claim.

In coming to this decision, the Federal Court, in a majority judgment (2:1), found that the plain meaning of section 27(1) of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA 2012”) is that the jurisdiction of an Adjudicator is limited to matters referred to by parties pursuant to sections 5 and 6 of CIPAA 2012. Since section 5(2)(b) of CIPAA 2012 requires the claimant to include in the Payment Claim the cause of action and the provision under the contract to which the payment relates, the Federal Court stated that the claimant must identify all the provisions in which it seeks to rely on, and the Adjudicator cannot rely on other provisions which have not been referred by parties.

Background Facts

The Respondent appointed the Appellant as the main contractor for the construction and completion of a project in Penang, for a sum of RM67,994,500.00.

In carrying out the Project, the Appellant had engaged independent professional Consultants to provide a report in regards to cracked beams and a safety report. The consultants’ fees incurred by the Appellant were RM855,074.21. As the Respondent had allegedly failed, neglected, or refused to pay the consultants’ fees, the Appellant brought a payment claim against the Respondent to adjudication under CIPAA 2012.

The Appellant served the Payment Claim on the Respondent on 6.3.2019. In the Payment Claim, the Appellant pleaded clauses 28, 55 and 56 of the Contract to establish its cause of action against the Respondent. In the Payment Response dated 22.3.2019, the Respondent contended, among others, that the Appellant’s claim does not fall within the meaning of “construction contract” under section 5(1) of CIPAA 2012.

Thereafter, in the Adjudication Claim, the Appellant again referred to and relied on clauses 28, 55and 56 of the Contract in support of its claim for the consultants’ fees. On the other hand, in the Adjudication Response, the Respondent contend that the relevant clause in relation to the Appellant’s claim would be clause 36.5 of the Contract which was not relied upon by the Appellant.

On 12.9.2019, the Adjudicator handed down the Adjudication Decision in favour of the Appellant. The Adjudicator awarded the sum of RM806,673.78 being the adjudicated sum, to the Appellant. In coming to the decision, the Adjudicator relied on clause 36.6 of the Contract rather than clauses 28, 55 and 56 of the Contract as submitted by the Appellant in the Payment Claim and Adjudication Claim. The Adjudicator found that clause 36.6 was most applicable to the Appellant’s claim.

At the High Court, the Appellant’s application to enforce the Adjudication Decision was allowed. Consequently, the High Court dismissed the Respondent’s application to set aside the Adjudication Decision. The High Court was of the view that the Adjudicator did not act beyond his jurisdiction and had acted fairly and independently.

However, the High Court’s decision was reversed on appeal. The Court of Appeal held that the Adjudicator had acted in excess of his jurisdiction when deciding the adjudication on a clause of the Contract that was not relied upon by the Appellant in the Payment Claim and Adjudication Claim. Further, the Court of Appeal found that the omission of the Adjudicator to invite the parties to submit on clause 36.6 of the Contract is a denial of natural justice. Hence, the Adjudication Decision was set aside.

On 3.1.2023, the Federal Court granted the Appellant’s leave to appeal on the following questions of law, namely:

Q1: Do the strict rules of pleadings, as applicable in civil claims before the Malaysian Courts, apply in adjudicating proceedings under the CIPAA 2012?

Q2: Whether the dicta in View Esteem Sdn Bhd v Bina Puri Holdings Bhd [2018] 2 MLJ 22 prohibits an adjudicator from referring to a specific clause in a construction contract when allowing the claim when the said clause was not specifically stated in the Payment Claim and Adjudication Claim by the claiming party?

Q3: In a CIPAA Award, does the adjudicator’s consideration of a specific clause in the construction contract, not specifically stated in the Payment Claim or Adjudication Claim, without inviting parties to submit further on the said clause, amount to a breach of natural justice or an act excess in the jurisdiction, such that the said Award ought to be set aside.

Summary of the Majority Grounds of Judgment by Nordin Bin Hassan, FCJ

In determining the appeal, the Federal Court found that the main issue relates to the jurisdiction of an Adjudicator under CIPAA 2012. Section 27 of CIPAA which speaks on the jurisdiction of the Adjudicator is held to be plain and unambiguous; in that the jurisdiction of an Adjudicator is limited to matters referred to by parties pursuant to sections 5 and 6 of CIPAA 2012.

Section 5 of CIPAA 2012 relates to Payment Claim, whereas Section 6 of CIPAA 2012 is in relation to Payment Response. Amongst others, section 5(b) of CIPAA 2012 requires the claimant to include in the Payment Claim the cause of action and the provision under the contract to which the payment relates. On this point, the Federal Court held that the cause of action in a contract must relate to a provision or provisions in the construction contract to support the claim. The cause of action arises when there is a breach of a provision of the contract and therefore, the cause of action is subject to the agreed provisions in the contract.

On the facts, the Federal Court found that the Adjudicator had relied on clause 36.6 of the Contract in allowing the Appellant’s claim, and did not rely on any of the clauses referred by the Appellant in the Payment Claim filed pursuant to section 5 of CIPAA 2012.

The Court further commented that the parties did not give written consent to extend the jurisdiction of the Adjudicator to adjudicate the matters relying on clause 36.6 of the Contract, as required under section 27(2) of CIPAA 2012, which the Court opined should have been done.

Since the Adjudicator’s jurisdiction is limited to matters referred to the Adjudicator under Sections 5 and 6 of CIPAA 2012, the Adjudicator exceeded his jurisdiction in deciding the dispute based on Clause 36.6 of the Contract (not pleaded/ relied upon by the parties).

As the Federal Court found that the Adjudicator had acted in excess of his jurisdiction, the Adjudication Decision can be set aside under section 15(d) of CIPAA 2012.

On the issue of denial of natural justice, the Federal Court found that it is undisputed that parties were not given the opportunity to submit on the cause of action under clause 36.6 of the Contract before the Adjudication Decision was delivered.

Further, submissions by the parties may have persuaded the Adjudicator in the present case to decide differently. The principle of natural justice includes allowing parties to present their case effectively.

The failure of the Adjudicator to provide an opportunity to the parties to submit on the cause of action under Clause 36.6 of the Contract before arriving at his decision in the Adjudication Decision, is a denial of natural justice.

In light of the above, the Court found that the issue of strict rules of pleadings does not arise as the Adjudicator’s jurisdiction is governed by section 27(1) of CIPAA 2012.

Therefore, the Federal Court affirmed the decisions of the Court of Appeal.

Summary of the Minority Grounds of Judgment by Mary Lim Thiam Suan, FCJ

The learned Federal Court Judge (FCJ) foremost opined that the analysis and resolution of the 3 questions of law requires a return to the fundamental principles of statutory adjudication introduced in Malaysia, and that it is a regime solely and exclusively for and in the realm and practice of construction contracts as defined in section 4 of CIPAA 2012. Further, the learned FCJ stated that the adjudication regime is only available to payment disputes, and that it is meant to resolve disputes relating to claims of non-payment for work done or services rendered under the express terms of a construction contract.

Another facet of the adjudication regime as highlighted by the learned FCJ is that persons who are qualified to sit or be appointed as adjudicators are not necessarily legally qualified. This feature has, in the learned FCJ’s view, a substantial bearing against any argument or insistence of likening adjudication proceedings to proceedings in a Court of law.

Having set out the basic principles of statutory adjudication in Malaysia, the learned FCJ went on to discuss the 3 questions posed:

Question 1

The learned FCJ was of the view that the answer must be in the negative as there are no pleadings in statutory adjudication as generally understood and practised in Court proceedings.

Under CIPAA, there are only 2 sets of documentation. The first set of documentation is known as the payment claim and the payment response, provided under sections 5 and 6 of CIPAA. The learned FCJ likened payment claim to a letter of demand, as at that stage, there is no payment dispute as yet to refer to adjudication. The second set of documentation would be the adjudication claim, adjudication response and adjudication reply.

The learned FCJ referred to View Esteem and stated that the difference between a payment claim and an adjudication claim is that the adjudication claim broadly outlines the “nature and description of the dispute along with the remedy sought” whereas the payment claim contains the details of the claim so that the cause of action can be discerned. Hence, it is the dispute that arises from the payment claim that the adjudicator is required to adjudicate upon, decide and deliver the adjudication decision. And because it is the dispute arising from the payment claim that is being referred to adjudication, the learned FCJ took the position that it would be erroneous and misleading to describe the payment claim and payment response as pleadings.

On the facts, the learned FCJ found that it was not the case that the Appellant failed to cite any provisions of the Contract and/or that the Appellant had failed to comply with section 5(2)(b) of CIPAA 2012. Even if the Adjudicator had determined the claim upon clause 36.6 of the Contract, which the learned FCJ opined he did not, the learned FCJ was of the view that this is not at all fatal to the Appellant. Thus, the learned FCJ disagreed with the Court of Appeal when it concluded that the Adjudicator’s reference or reliance to clause 36.6 of the Contract was fatal to the Appellant.

The learned FCJ also opined that the Court of Appeal had failed to give proper and due regard to the whole statutory adjudication scheme, the intent of CIPAA, its operation and application.

Specifically on section 5(2)(b) of CIPAA 2012, the learned FCJ is of the view that the inclusion of the words “including the provision in the construction contract to which the payment relates” is intended to be illustrative of what those details may be. The reason for this is so that the non-paying party can respond to the claim for work done or services rendered. In this case, the learned FCJ found that the Respondent had no difficulty at any stage to respond to the Appellant’s claim.

As regards section 27 of CIPAA 2012 on the jurisdiction of an adjudicator, the learned FCJ stated that the matter in dispute which was referred to adjudication was the claim for professional fees due under the terminated contract, and the Respondent was fully aware of that being the real and sole issue. Hence, the learned FCJ was of the view that the non-citing or even the citing of a wrong clause or provision of the contract does not render and cannot render the adjudicator bereft of jurisdiction.

In addition to the above, the learned FCJ found that on the examination of the correspondence exchanged, especially the letters sent by the Appellant, the letters show that the Appellant had actually invoked, among others, clause 36.6 of the Contract. The relevant correspondence was also cited in the Payment Claim, and also form part of the Adjudication Claim. Hence, clause 36.6 of the contract was quite clearly cited, and the Adjudicator’s reference to this clause was not done in the frolic of his own.

The learned FCJ further added that the whole construction contract was already before the Adjudicator, “pleaded” as it were, and it would be naïve to suggest that the Adjudicator is not entitled to look at the whole contract for its full terms and effect.

Question 2

The learned FCJ stated that in view of Her Ladyship’s reasons in relation to Question 1 and Her Ladyship’s finding that clause 36.6 of the Contract was actually “pleaded” or raised in the Payment Claim as well as Adjudication Claim, this question does not arise.

In any case, the learned FCJ was of the view that even if the Adjudicator had referred to or relied on clause 36.6 and such clause was not raised by the Appellant in the Payment Claim or Adjudication Claim, such reference or reliance is not fatal to the Appellant’s cause by reason of section 5(2)(b) of CIPAA 2012. The learned FCJ disagreed with the Court of Appeal’s interpretation of the dicta in View Esteem. The effect of View Esteem in respect of section 27 of CIPAA 2012 is simply that the adjudicator’s jurisdiction in relation to any dispute is limited to the matter of the claim which was referred to adjudication under sections 5 and 6 of CIPAA 2012.

As such, Question 2 is in the negative.

Question 3

In light of the learned FCJ’s findings that clause 36.6 of the Contract which purportedly formed the basis of the Adjudicator’s decision was actually cited in the Payment Claim, this Question was also answered in the negative.

In discussing this Question, the learned FCJ stated that it is only if the adjudicator goes off on a frolic of his own, decide the case on a factual or legal basis which has not been argued or put forward by either side, without giving the parties an opportunity to comment or put in relevant evidence, if appropriate, that the breach may be said to be material rendering the decision reached liable to be set aside. However, if the “frolic” of the adjudicator makes no difference to the outcome, the decision must be enforced.

On the facts, the learned FCJ found that the reference by the Adjudicator to clause 36.6 of the Contract did not have the same materiality or significance. In addition to the fact that the Respondent was fully aware of the entire clause 36 of the Contract, the learned FCJ found that it was a matter of contractual construction which the Adjudicator was entitled to decide.

The learned FCJ concluded that it should only be in rare circumstances that an adjudication decision is set aside.

Comments

In light of the majority decision of the Federal Court, the non-paid party/ claimant must be careful to refer and rely on all relevant clauses of the construction contract in the payment claim as well as adjudication claim, to avoid the adjudication decision being set aside on the grounds of excess of jurisdiction and/or breach of natural justice.

The adjudicator is strictly confined to adjudicate on matters pleaded within the adjudication pleadings. Therefore, parties involved in adjudication proceedings must be meticulous and ensure that the relevant clauses in a contract and/or cause of action is pleaded in the adjudication pleadings.


This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.

About the author

Amy Hiew Kar Yi
Partner
Corporate Disputes, Construction, Projects & Energy
Harold & Lam Partnership
[email protected]

Chew Jin Heng
Associate
Dispute Resolution
Halim Hong & Quek
[email protected]

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