Transformation of Malaysian Construction Justice
By YA Dato’ Lim Chong Fong as published in MBAM 60th Anniversary Coffee Table Book
The construction industry worldwide is dispute prone and the Malaysian construction industry is without exception. These disputes are defaults arising from mismatch in expectations of the parties in the course of the implementation of the construction contract. They often revolve around construction quality, time for completion, extra work, abandonment of the project and inadequate or non-payment for work done.
It is the norm of the construction industry that construction contracts are awarded on tender or negotiated basis. Terms of the contract are dictated primarily by the party awarding the contract who is also the party making the payment. These terms may not necessarily be fair or balanced and that results in the other party absorbing considerable unwarranted risks whilst undertaking the work.
The undertaking of construction work is also inherently complex in nature. It involves multiparty participation often under open physical environment. Moreover it is capital intensive to finance the usage of materials and deployment of plant and labour. The challenge is undoubtedly to have the project completed on time to the required quality at the desired cost.
Construction disputes ensue from the eventuation of the unwarranted risks or unmet challenge or both. The affected parties in dispute naturally want justice for their loss or grievances by way of compensation. In a civilised community, justice can only be meted out by a dispute resolution forum recognised by the legal system of the country. The expectation of the disputant parties in the dispute resolution process is plainly for expert, swift and economical justice.
THE EARLY YEARS OF CONSTRUCTION CONTRACTING & DISPUTE RESOLUTION
In the early years of development of Malaysia in the late 1960s, the private sector mainly utilised the PAM/ISM Agreement and Conditions of Building Contract (1969 Edition) whilst the public sector utilised the PWD Agreement and Conditions of Contract. Both these contracts were adopted from the English RIBA standard forms of building contract and modified to suit local conditions. These forms were for use at the main contract layer with accompanying forms for nominated subcontracts. From judicial decisions in the United Kingdom, there were anomalies and weaknesses seen in the forms. Consequently the private sector form was revised in 1998 to the PAM Agreement and Conditions of Building Contract (1998 Edition) and the public sector form was substantially revamped and revised in 1983 as the PWD 203/203A Agreement and Conditions of Contract (Rev. 10/83) to be followed with six later addendums. That notwithstanding, there was also widespread usage of bespoke construction contracts or major amendments made to the PAM form by the private sector to protect the employer’s interest since the 1990s.
As for dispute resolution, court litigation was the principal mode of resolution of construction disputes in the early years. The notable cases seen include: Yong Mok Hin v United Malay States Sugar Industries Ltd where the dispute concerned repudiation of the contract by the main contractor due to non-payment of progressive payments by the employer, Bandar Raya Developments Bhd v Wong Hoe Kan & Sons Sdn Bhd on set offs against an interim certificate, Kunchi Raman v Goh Brothers Sdn Bhd which concerned repudiation and defective work done, Tan Hock Chan v Kho Teck Seng on the dispute of failure to give site possession and the resultant quantum meruit claim, Sim Chio Huat v Wong Ted Fui on time being of the essence as well as time at large, Syarikat Tan Kim Beng and Rakan-Rakan v Pulai Jaya Sdn Bhd which dealt with extension of time under the PAM form of contract and Kokomewah Sdn Bhd v Desa Hatchery Sdn Bhd on defective construction, delay and termination of the construction contract.
The apex Federal Court also dealt with the landmark construction case of Pembenaan Leow Tuck Chui and Sons Sdn Bhd v Dr Leela Medical Center Sdn Bhd on set off against the penultimate certificate pursuant to the PAM form of contract.
There were sporadic usage of arbitration for dispute resolution as seen from the notable cases of Cheng Keng Hong v Government of the Federation of Malaya on variations and Sharikat Pemborong Pertanian dan Perumahan v Federal Land Development Authority which dealt with abandonment of work. By the 1990s, there were more arbitration cases seen such as A. C. Ho Sdn Bhd v Ng Kee Seng (t/a Konsultant Senicipta), Usaha Damai Sdn Bhd v Kerajaan Negeri Selangor, Shencourt Sdn Bhd v Arab Malaysian Toda Construction Sdn Bhd, and Daewoo Corporation v Bauer (M) Sdn Bhd. The arbitrations were all conducted under the Arbitration Act 1952 (Rev.1972) which were unsatisfactory because, amongst others, there was the right of the parties to state a consultative case to the High Court on questions of law mid-stream during the arbitration proceedings thereby frustrating the expeditious conclusion of the arbitration. Besides there were many challenges made against the arbitral awards in court for misconduct and error of law on the face of the award thereby further delaying the ultimate enforcement of the arbitration award.
By the close of the old millennium, it was perceived by the users that construction litigation and arbitration were not satisfactory as they were prolonged, increasingly expensive and subjected to unending court consultations and challenges.
TRANSFORMATION INITIATIVES IN THE NEW MILLENNIUM
As for construction contracts, the Construction Industry Development Board (CIDB) launched the 2000 standard form of construction contract which is balanced in terms of risks allocation shared between the parties and available remedies for default. This standard form did not however enjoy the popularity and usage it sought to achieve. It was not used at all by the public sector. There was only minimal usage in the private sector. The problem is that the standard form has been perceived to alter the status quo and is therefore adverse to the interest of the party making payment. The public sector instead in the latter half of the 2000s made a major revision to the PWD 203/203A Agreement and Conditions of Contract with the launch of the 2007 revision. There were further amendments in the 2010 revision and 2013 addendum particularly to cope with the advent of statutory adjudication. The revised PWD 203/203A Agreement and Conditions of Contract are skewed in favour of the Government. In respect of the private sector contract, the PAM form was revised in 2006 to re-balance the risks allocation between the parties as well as to set out detail contract administration procedures including the imposition of strict conditions precedent relating to time and money claims. Many contractors and sub-contractors may not be prepared or even realize the drastic consequences of noncompliance with these conditions precedent. That notwithstanding, it is also seen that many private sector employers have introduced their own bespoke addendums to complement and “water-down” the PAM 2006 contract to their favour.
With regard to dispute resolution, the CIDB spearheaded construction mediation that included making mediation mandatory as a prelude to arbitration in the CIDB 2000 standard form of construction contract. The CIDB trained and created a pool in excess of 200 mediators. Unfortunately, construction mediation did not take-off in resolving construction disputes that arose from the problems plagued in the construction industry. It was hardly used principally because it is a non-binding procedure and is therefore incapable of enforcement to compel payment.
Akin to court litigation, arbitration is a binding procedure. By the early 2000s, the Government of Malaysia was cognisant that there was the need to reform arbitral law in particular to repeal and reform the Arbitration Act 1952 (Act 93) in order to reposition Malaysia to compete to be preferred venue for international arbitrations. As a result the Arbitration Act 2005 (Act 646) was enacted based on the UNCITRAL model law. The new arbitration statute, amongst others, repeals the consultative case procedure. It is replaced with a regime of reference to court on questions of law. This new regime of reference to court may either be contracted out or in by the parties depending on whether the arbitration is a domestic or an international one respectively. There is greater finality in the arbitration if the right of reference to court is absent. Besides the introduction of the new arbitration statute, the Government has rejuvenated the Kuala Lumpur Regional Centre of Arbitration (KLRCA) which besides the Pertubuhan Akitek Malaysia, administers many domestic construction arbitrations. The pool of trained arbitrators in the KLRCA has been expanded and the KLRCA Rules of Arbitration have been revised now and again to better equip the arbitrators to conduct the arbitration with more effectiveness. Consequently construction arbitrations continue to be popular and widespread in the resolution of construction disputes even though the conclusion is not necessarily swift.
By reason of the success seen in several Commonwealth countries that have enacted statutory adjudication to resolve construction disputes, the CIDB launched a similar initiative in the mid-2000s. The aim is primarily to create swift dispute resolution procedure to relieve choked cash flow by disputed non or underpayment for work done or services rendered. This initiative was overwhelmingly supported by developers, contractors, sub-contractors, suppliers and professional consultants to be however met with opposition from arbitrators and lawyers. After much debate and compromise that took place over several years, the Construction Industry Payment and Adjudication Act 2012 (Act 746) (CIPAA) is finally enacted in June 2012. In hindsight, the enactment of the CIPAA was only made possible due to persistent and unrelenting efforts of the Master Builders Association Malaysia (MBAM) as another prime mover of that initiative in tandem with the CIDB. The CIPAA is an interesting legislation which may not be easily navigated. The KLRCA as the Adjudication Authority has trained in excess of 300 adjudicators to cope with the anticipated massive influx of statutory adjudication cases.
Notwithstanding that construction arbitrations were widely used, there was concurrently still much court litigation on construction disputes where there was no arbitration agreement or those multipartite ones involving tortuous claims. The Bar Council in the late 2000s hence embarked on the initiative to convince the Malaysian Judiciary and the Works Minister to establish a specialist construction court that will complement construction arbitration and statutory adjudication. The initiative gained momentum when the CIDB jointly participated in that initiative after the enactment of the CIPAA. The Chief Justice on the Opening of the Legal Year 2013 announced that the specialist construction courts will be set up in Kuala Lumpur and Shah Alam with specialised judges to hear disputes as demand for construction projects rise. Both courts became operational on 1st April 2013. The construction court will focus on resolving complex, technical cum legal construction disputes and is expected to dispense expedient resolution of all construction disputes that do not get referred to arbitration or adjudication and include challenges to construction arbitration awards and adjudication decisions and enforcement of adjudication decisions.
THE FUTURE AND WAY AHEAD
The Chief Executive of the CIDB, Dato Sri Dr Judin Abd Karim has stated that the trinity comprising of the KLRCA, CIPAA and a specialist construction court will give the construction industry significant boost in reducing delays in construction projects. New dispute resolution procedures nevertheless bring new challenges. Consequently, the success or otherwise of the Malaysian transformed construction justice landscape will be seen in the not too distant future.
Be that as it may, it is plain that the successful implementation of the transformation forthwith requires adequate supporting infrastructure. There must be the publication of law reports of judgments from the construction courts. A construction law and dispute resolution academy should be established that offers programs to train construction advocates, adjudicators, arbitrators, mediators, expert witnesses and even judges. These programs can be from diploma to postgraduate level in collaboration with a distinguished partner university.
The academy should also be the focal point for all of them and other construction players to meet exchange and share professional experiences through regular evening get-togethers, lectures and talks. There must be a resource centre housed in the academy complete with leading local and foreign construction law and management literature. The CIDB is best placed to spearhead, fund and operate this academy with the support of the Building Industry Presidential Council organisations and the Bar Council Malaysia. Finally, there is the medium term future need to perhaps regulate construction contracting to deal with the prevailing and continuing problem of unbalanced and unfair allocation of risks in construction contracts. The problem undoubtedly stems from lopsided bargaining power of parties including negotiations which often lacked good faith. The solution is necessarily a statutory one developed from foreign ideas and concepts such as the Unfair Contract Terms Act of the United Kingdom and the Fair Trading Act of Australia. This may again be the opportunity for the MBAM jointly with the CIDB to formulate and promote it.