Construction Industry Payment and Adjudication Act 2012

The question of whether a company can be wound up for failing to make payment in accordance with the terms of an adjudication decision was recently canvassed by the Court of Appeal in Bludream City Development Sdn Bhd v Pembinaan Bina Bumi Sdn Bhd.

The Court of Appeal’s decision can be found here.

Background Facts

The Appellant, a developer of a service apartment located at Mines Resort City, engaged the Respondent to construct and complete the building and infrastructure works of the project.

On 17 July 2019, the Respondent initiated adjudication proceeding against the Appellant for unpaid work done in relation to the Project amounting to RM5,510,197.91. The adjudicator decided in the Respondent’s favour, with the Appellant ordered to pay the adjudicated sum of RM6,175,669.10 to the Respondent (“Adjudication Decision”).

On 4 March 2020, the Appellant filed an originating summons in the High Court to set aside and stay the Adjudication Decision. Simultaneously, the Respondent filed an originating summons in the High Court to enforce the Adjudication Decision.

On 13 August 2020, the Appellant’s architect issued valuation report no. 37, interim certificate no. 37 and a revised statement of final account, attempting to substantially reduce the amount the Appellant owed the Respondent. Consequently, the Respondent commenced arbitration to challenge the interim certificate and the revised statement of final account. The Appellant cross-referred its dispute vis- a-vis the Adjudication Decision to the same arbitration.

In December 2020, the High Court dismissed the Appellant’s application to set aside and stay the Adjudication Decision and granted the Respondent’s enforcement application.

Dissatisfied, the Appellant appealed to the Court of Appeal against both decisions of the High Court; these appeals were also dismissed. Finally, the Appellant’s application seeking leave to appeal to the Federal Court was dismissed in October 2022.

While that process had been taking its course, following the dismissal of the Appellant’s application in the High Court, the Respondent had served on the Appellant a statutory demand pursuant to Section 465 (1) (e) of the Companies Act 2016, demanding payment of the RM6,175,669.10 premised on the Adjudication Decision. The Respondent received no response from the Appellant.

Winding-Up Petition

With the Appellant failing to respond to the demand within the prescribed timeframe, the Respondent instituted a winding-up petition against the Appellant (“Petition”) on 23 September 2021.

The Appellant applied to strike out the Petition, but the application was dismissed. Subsequently, the Appellant filed an application seeking a Fortuna injunction to restrain the Respondent from continuing with the winding-up proceeding against the Appellant, but this application was also dismissed.

On 15 November 2022, the Petition was granted by the High Court (“Judgment”). In allowing the Petition, the High Court held that:

the Adjudication Decision had been enforced as a court judgment and the debt demanded in the statutory demand (which was based on the Enforcement Order) was an undisputed judgment debt;
the fact that the Adjudication Decision had the element of “temporary finality” did not mean that it was denuded and devoid of any effect unless it had been stayed;
the valuation report no. 37 and the interim certificate no. 37 were issued to frustrate the Respondent’s claims and to avoid paying for the work carried out;
the failure on the part of the Appellant to pay the judgment debt triggered the presumption that the Respondent was unable to pay its debt; and
in any event, the Appellant had failed to adduce sufficient evidence to show that the Respondent was commercially solvent, financially fit, and capable of paying its debts to the Respondent.

Dissatisfied with the Judgment, the Appellant lodged an appeal to the Court of Appeal.

In the Court of Appeal

On appeal, the Appellant contended, amongst others, that:

the Respondent could not rely on the Adjudication Decision to commence winding-up proceedings when the disputed Adjudication Decision was pending final determination through arbitration or through Court proceedings;
since the status of an adjudication decision was one of “temporary finality” only, the right to wind up a company based on the Adjudication Decision contradicted the legislative intent of CIPAA; and
the cross-claims raised by the Appellant in the arbitration extinguished the Respondent’s adjudicated claim allowed in the Adjudication Decision, leaving a sum of RM1,939,987.83 payable to the Appellant.

The Appellant’s contentions were primarily based on the decisions delivered in ASM Development (KL) Sdn Bhd v. Econpile (M) Sdn Bhd [2021] 8 MLJ 99 and Setia Fontaines Sdn Bhd v. Pro Tech Enterprise Sdn Bhd [2023] MLJU 628.

In reply, the Respondent argued that:

it was trite that the Appellant could be wound up based on an adjudication decision, particularly in light of the Court of Appeal decision in Sime Darby Energy Solution Sdn Bhd (formerly known as Sime Darby Offshore Engineering Sdn Bhd) v. RZH Setia Jaya Sdn Bhd [2022] 1 MLJ 458; and
given the Appellant’s failure to make payment of the indisputable debt determined in the Adjudication Decision, the High Court correctly ordered the winding up of the Appellant.

In addressing the pivotal question of whether a company can be wound up for a failure to comply with a CIPAA adjudication decision, the Court of Appeal analysed a plethora of cases pertaining to the threshold for winding up, including the decision in Sime Darby Energy Solution. Following that analysis, some appellate Court’s key findings were that:

although the right to wind up a company based on an adjudication decision is not expressly provided for in CIPAA, the principles governing winding up in response to an inability to pay debts is plainly provided in Sections 465 and 466 of Companies Act 2016;
a company may be wound up for an inability to pay debts even if the payment sought was not based on a judgment debt;
an unpaid debt that had been adjudicated ceases to be disputable in a subsequent winding-up proceeding; and
it was immaterial in the winding-up court that the non-paying party was still disputing the adjudicated debt or that it had referred the dispute to arbitration or the court for final determination.

The Court of Appeal therefore affirmed its decision in the Sime Darby Energy Solution case that a successful party in adjudication proceedings may wind up the non-paying party based on an adjudication decision.

In this regard, the Court of Appeal in its grounds of judgment expressly held that the decisions in ASM Development (KL) Sdn Bhd v. Econpile (M) Sdn Bhd [2021] 8 MLJ 99 and Setia Fontaines Sdn Bhd v. Pro Tech Enterprise Sdn Bhd [2023] MLJU 628 were erroneous.

In other parts of the judgment, the Court of Appeal found that:

the architect’s act of unilaterally revising previously certified variation orders after the Adjudication Decision lacked bona fide and were contrived merely to defeat the Petition;
the Appellant’s allegations of late completion that surfaced in 2021 (the project had been completed in December 2017) were repugnant to common sense; and
the Appellant did not have cash flow solvency and that was sufficient to justify the winding up of the Appellant under Section 465 of the Companies Act 2016.

Moving Forward

Previously, the Court of Appeal in Likas Bay Precinct Sdn Bhd v Bina Puri Sdn Bhd [2019] 3 MLJ 244 and Sime Darby Energy Solution had decided that an unpaid party could wind up a non-paying party based on an adjudication decision.

However, a conflicting stance emerged when the High Court in ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd [2021] 8 MLJ 99 held otherwise. This position was subsequently echoed in Maju Holdings Sdn Bhd v Spring Energy Sdn Bhd [2020] 1 LNS 1332 and Setia Fontaines Sdn Bhd v Pro Tech Enterprise Sdn Bhd [2023] MLJU 628.

With the Court of Appeal expressly overruling the High Court decision in ASM Development (KL) Sdn Bhd and Setia Fontaines Sdn Bhd v. Pro Tech Enterprise Sdn Bhd, there is now more clarity surrounding the question of whether an adjudication decision constitutes an undisputed debt in winding up proceedings.

Author: Casper Tey

Published by JJNN in Alternative Dispute Resolution

Tags: adjudication, cipaa, construction, Construction Industry Payment and Adjudication Act 2012, winding-up

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.

For queries, please contact any of the following persons:

Tai Wei Jeat (jeat@jjnn.com.my)
Nicholas Mark Pereira (nic@jjnn.com.my)
Harish Nair (harish@jjnn.com.my)

Published by JJNN in Alternative Dispute Resolution, Dispute Resolution

Tags: adjudication, cipaa, construction, Construction Industry Payment and Adjudication Act 2012

A Cautionary Tale: From Adjudication Decision to Winding-Up

Setting Aside Adjudication Decisions under CIPAA: Growing Judicial Trends