Setting Aside Adjudication Decisions under CIPAA: Growing Judicial Trends

Since its introduction in 2014, the Construction Industry Payment and Adjudication Act 2012 (‘CIPAA’) and its effects have been widely felt throughout the construction industry. In its attempt to address the cash flow problems that had long pervaded the industry, CIPAA’s applicability to all construction contracts also increased the palette of tools available to contractors seeking to recoup finances. 

Under CIPAA, disputes may be adjudicated summarily, and the resulting adjudication decision will become binding and enforceable on the parties. Section 15 of CIPAA provides that an aggrieved party may apply to the High Court to set aside an adjudication decision on certain grounds, with one such ground being a denial of natural justice. A section 15 setting aside application premised on a denial of natural justice may succeed before a court where the grievances indicate that the adjudicator had conflicts of interest (rule against bias) and/or that the adjudicator did not hear both sides of the dispute (the right to a fair hearing).

The High Court recently issued several decisions expanding upon what may amount to an adjudicator not hearing both sides of the dispute, undoubtedly issued in response to the spate of claims attempting to set aside adjudication decisions on such grounds. Two High Court decisions best shed such insight into this growing judicial thinking.

(1) China Construction Yangtze River (M) Sdn Bhd v Gold Mart Sdn Bhd [2022] MLJU 1789

Consequent to an adjudication under CIPAA, the Defendant was ordered to pay RM1,354,435.39 to the Plaintiff (‘the Decision’). Despite the Decision being in their favour, the Plaintiff applied to set aside the Decision.

In court, the Plaintiff confined its claim to a denial of natural justice on the part of the adjudicator. The Plaintiff contended that the adjudicator failed to consider two arguments advanced by the Plaintiff that would have otherwise increased the amount payable to the Plaintiff.

Firstly, the Plaintiff argued that the adjudicator failed to consider the issue of the Plaintiff’s lawful suspension of the Project works, which affected the sum of liquidated damages in the Decision (‘the Lawful Suspension Issue’). Secondly, the Plaintiff contended that the adjudicator did not consider the issue of the ‘wider scheme’ agreed between parties to waive the renewal of the performance bond which would have affected the Defendant’s right of set-off (‘the Wider Scheme’).

The Lawful Suspension Issue

The Plaintiff contended that the Defendant’s failure to promptly pay the Plaintiff in accordance with the contract caused the Plaintiff to exercise its right to suspend the Project under the Contract.

Shortly after the imposition of the Movement Control Order in 2020, the Defendant denied being indebted to the Plaintiff as claimed. Instead, the Defendant asserted that it had overpaid the Plaintiff after taking into account the deduction of liquidated damages among other things. The Plaintiff continued suspending the Project works, leading to the Defendant determining the employment of the Plaintiff under the Contract.

The Plaintiff contended that, at the point of the Defendant’s determination, the adjudicator wrongly assessed the set-off of RM49,230,000 for liquidated damages deductible as the adjudicator did not consider the Plaintiff’s entitlement to an extension of time due to the lawful suspension of the Project owing to the imposition of MCO.

The Wider Scheme

The Plaintiff contended that the adjudicator also allowed the set-off/retention of the sum equal to the performance bond without considering the ‘wider scheme’ agreed to by both parties that obviated a further requirement of providing a performance bond by the Plaintiff.

The High Court’s Decision: the Lawful Suspension Issue

The High Court relied on the dicta in ACFM Engineering & Construction Sdn Bhd v Esstar Vision Sdn Bhd [2016], where the Court of Appeal observed that the fact that the appellant did not complain that the adjudicator had got the disputes on a wrong footing or that the adjudicator premised his decision on the wrong issues pointed towards the fact that the appellant’s complaint related to the merits of the adjudicator’s decision. The Court of Appeal held that section 15 of CIPAA does not provide for a court to review the merits of a decision or decide the facts of the matter. Instead, the  court should look only at the manner at which the adjudicator conducted the hearing for errors of law of procedural fairness.

In deciding the Lawful Suspension issue, the High Court found that the adjudicator had not stated anywhere in the Decision that he would not consider the issues advanced by the Plaintiff. Rather, the High Court observed that the adjudicator made note of the Plaintiff’s expert evidence as adduced at the adjudication:

‘… I find that the adjudicator stated as follows in paragraph (31) of his Decision in respect of the first of two issues raised here by the Plaintiff:

“… I note that Mr Powell was of the view that no EOT is due in relation to the MCO and CMCO, but I take a different view

As such, the High Court held that the adjudicator had indeed considered the Lawful Suspension issue, and had come to a decision after considering the competing expert evidence. The High Court remarked that even if there was an error on the computation of extension of time, this would go to the merits of the Decision.

The High Court’s Decision: the Wider Scheme

The High Court disagreed with the Plaintiff’s contention that the adjudicator had failed to consider the Wider Scheme issue. Instead, the Court held that the adjudicator had in fact considered this issue in the Decision but found that it was inconclusive as to whether a definitive agreement had been reached:

‘… I find that the adjudicator stated as follows in paragraph (47) of the Decision:

“… I am of the view that any arrangement reached… would have been part of a wider scheme which contemplated inter alia the completion of at least part of the Contract Works and which wider scheme has been superseded by events… I make no findings as to whether such wider scheme was ever agreed between the parties”.’

As such, the Wider Scheme was merely “peripheral and not material to justify a denial of natural justice even if the same has not been considered by the adjudicator as so contended by the Plaintiff”.

(2) PBJV Group Sdn Bhd v Enquest Petroleum Production Malaysia Ltd [2022]

Consequent to a letter of award followed by a formal PM-MCM contract (collectively ‘the Contract’), Enquest appointed PBJV as its contractor to execute the provision of maintenance, construction and modification works (‘the Works’).

Upon carrying out each portion of the Works as instructed, PBJV would submit tax invoices to Enquest. A total of 365 tax invoices were submitted by PBJV, with 307 approved and paid by Enquest. PBJV subsequently issued a notice of demobilisation of the Contract and a payment claim to Enquest pursuant to CIPAA for underpayment/non-payment of the 57 tax invoices of work done totalling to RM73,570,587.19.

The adjudicator ordered Enquest to pay PBJV a sum of RM71,567,429.55 together with interests and costs (‘the Decision’). Enquest did not make payment of this sum, and PBJV sought recourse by filing court proceedings whilst Enquest filed an application to set aside the Decision (‘the Setting Aside Application’).

Enquest contended that there had been a denial of natural justice and advanced three lines of argument. Firstly, the adjudicator failed to consider any of the clauses cited and relied upon by Enquest in its adjudication response and thus failed to appreciate the true effect and nature of the Contract when rendering the Decision. Secondly, the adjudicator adopted a ‘broad-brush’ approach without considering the specific arguments advanced by Enquest on each head of PBJV’s claims. Finally, the adjudicator failed to seek clarification notwithstanding an acknowledgement that there were discrepancies in PBJV’s supporting documents.

The High Court’s Decision

The High Court observed that section 15 of CIPAA was not meant as an appeal on the merits of an adjudication decision and referred to ACFM Engineering and Construction Sdn Bhd v Esstar Vision Sdn Bhd [2016], where it was held that natural justice ‘is nothing more than what we call the concept of ‘procedural fairness’’. Reference was also made to Ireka Engineering and Construction v PWC Corporation Sdn Bhd [2019], where the Court of Appeal held that there are two limbs to the rules of natural justice: (1) a man should not be the judge in his own cause; and (2) a judge must hear both sides of the dispute. In that vein, the court placed weight on the fact that the aggrieved party made no complaints that they were prevented from tendering evidence or from making certain submissions during the adjudication proceedings.

The High Court observed that the adjudicator had appropriately reviewed the adjudication claim and reply and had appropriately distilled the principal eight issues that required his decision. The High Court stressed that ‘the Decision must be read and understood contextually’ and by doing so there was ‘nothing seen the Decision that the Adjudicator has expressly excluded any argument put forth by the parties.’.

The High Court held that the Decision ‘need not be scrutinized with a fine-tooth comb addressing each and every argument raised by the parties’ and more particularly, an ‘absence of the adjudicator addressing each and every argument raised by the parties do[es] not mean that the Decision is unreasoned’.

Most notably, the High Court judge opined that adjudication decisions ‘must have reasons which on practical terms are often the winning party’s argument’ and although ideal, the ‘adjudication decision need not however have reasons that address the converse which on practical terms are the losing party’s position’.

In view of the above, the High Court held that the adjudicator had sufficiently set out his reasons to substantiate his findings when the Decision was read as a whole. The Court also held that Enquest’s complaint that the adjudicator did not seek clarification from the parties did not merit court intervention, as it was the adjudicator’s ‘prerogative to attach the appropriate weight to the evidence accordingly’.

Take-Home Points

The two High Court decisions above demonstrate that the courts lean towards the position that an adjudicator is only deemed to have not heard both sides of the adjudication dispute where the adjudicator makes express statements that they would not consider and decide issues advanced by either party.

The converse implication is that a court is more willing to find an adjudicator as having considered an argument even if an adjudicator merely refers to the argument in passing, or even only to the aggrieved party’s expert evidence, as was the case in China Construction Yangtze River v Gold Mart Sdn Bhd [2022]. Additionally, an adjudicator making ‘broad brush’ considerations without particularization or specification of ‘each and every argument raised’ does not equate to a breach of natural justice, as demonstrated in PBJV Group Sdn Bhd v Enquest Petroleum Production Malaysia [2022]. Notably, a court will train their attention towards the adjudicator’s reasoning in their rendered decision and will accept an adjudicator’s reasoning that are adoptions of the successful party’s position.

It may therefore be taken that, when dealing with an allegation by an aggrieved party of there being a denial of natural justice, the courts start from the position that the adjudicator has more likely than not accorded procedural fairness to the parties. Parties considering mounting a section 15 setting aside claim premised on the adjudicator not hearing both sides, i.e., a denial of natural justice, will require a compound of express facts other than just the sole contention that there was an absence of points in the adjudication decision addressing each and every argument.

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