When a contractor takes over the sub-contractor’s works, can the contractor make a claim in adjudication against the sub-contractor? Scenarios as such are not uncommon as contractors may be obliged to take over the sub-contractor’s works when the sub-contractor can no longer proceed with its work, refuses to carry out rectification works, or worst, abandons the project altogether.
Contractors who find themselves in such circumstances and wish to make a claim against the sub-contractors by way of an adjudication under the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) should be wary of the recent High Court case, Hiform (M) Sdn Bhd v Pembinaan Bukit Timah Sdn Bhd and another case (1).
Brief Facts
Pembinaan Bukit Timah Sdn Bhd (“PBT”) had been appointed by the Main Contractor to carry out and complete a construction project in Putrajaya (“Project”). Thereafter, PBT appointed Hiform (M) Sdn Bhd (“Hiform”) by a letter of award dated 8.1.2015 (“Contract”) as its sub-contractor to supply labour, materials and all machineries and equipment and tools for the execution and completion of reinforced concrete works for the Project (“Works”).
However, disputes arose between the parties in respect of the progress of the Project during the course of execution, which led to Hiform withdrawing itself from the Project and PBT taking over the execution of the Project until completion.
Adjudication
On 7 October 2019, PBT issued its payment claim pursuant to CIPAA but no payment response was received from Hiform. Thereafter, on 24 December 2019, PBT commenced adjudication proceedings against Hiform. In its adjudication claim, PBT claimed as follows:
(a) Labour costs for rectification and/or completion of the Works;
(b) Material costs for rectification and/or completion of the Works; and
(c) Liquidated damages, besides interest and costs.
The Adjudicator, after reviewing the parties’ submissions, determined that she had jurisdiction to hear the dispute and decided that Hiform was to pay PBT RM14,990,503.60, which consisted of liquidated damages and additional costs. Dissatisfied with the decision, Hiform applied to set it aside at the High Court. By reason of non-payment of the adjudicated sum, PBT also applied to enforce the decision.
Did the Adjudicator Have Jurisdiction?
At the High Court, Hiform contended that PBT’s claims do not fall within the definition of “payment” under CIPAA as PBT’s claims were for rectification and completion of the Project as well as liquidated damages — which essentially flowed from Hiform’s breach of the Contract.
PBT, however, argued that its claims were contractual and expressly provided for in the Contract. Further, PBT contended that:
(a) Contractors are not restricted from pursuing adjudication against a sub-contractor under the CIPAA;
(b) CIPAA does not distinguish between the party appointing or the party appointed under the construction contract as the unpaid or non-paying party respectively;
(c) PBT is clearly the unpaid party because it has not been paid in whole or in part under the Contract, while Hiform is the non-paying party against whom the claim was made; and
(d) PBT’s claim is for payment for work done and services rendered under the express terms of the Contract.
High Court’s Decision
Having analysed the case authorities and applying the principles of statutory interpretation, the High Court Judge — in setting aside the adjudication decision — held that the source of the claim determines whether it is covered under CIPAA, not the structure of the contracting pyramid.
While debts for unpaid work done and/or services rendered under the express terms of the construction contract (which form part of the consideration under Section 2(d) of the Contracts Act 1950) are covered under Sections 4 and 5 of CIPAA, unpaid debts or damages arising from a breach of contract are not.
As PBT’s claims arose from Hiform’s alleged repudiatory breach of contract, the claims did not form part of the consideration of the contract to carry out the works.
The High Court further clarified:
(a) If PBT, with Hiform’s consent or request, had supplied materials and/or labour during the execution of the Project but was not paid by Hiform, that unpaid debt would be claimable under CIPAA.
(b) Debt or damages resulting from breach of contract can be raised as a cross-claim, defence, or set-off in an adjudication proceeding, but cannot be an adjudicatable claim itself.
Comments
The High Court has provided further clarity that CIPAA is not the proper avenue for claims for damages arising from a breach of contract. However, such claims may be raised as a cross-claim or set-off against a claimant’s claim.
For any enquiries, please contact:
Foo Joon Liang FCIArb, FSIArb, FHKIArb
Partner, Gan Partnership
E: joonliang@ganlaw.my
Tasha Lim Yi Chien
Associate, Gan Partnership
E: tasha@ganlaw.my
(1) [2020] MLJU 2452
This article is for general information only and should not be relied upon as legal advice. The position stated herein is as at the date of publication on 9 March 2021.
