Can the proceeds of a performance bond be claimed in an adjudication commenced under the Construction Industry Payment and Adjudication Act 2012?

By Karen Ng Yueh Ying, Partner, Messrs. Yatiswara, Ng & Chan 

It is a norm in the construction industry that an employer under a construction contract will require its contractor to furnish a performance bond to guarantee its performance under the construction contract. The performance bond is usually furnished by the contractor in the form of a bank guarantee.

Question: In the event an employer makes a demand on the performance bond and the proceeds of the performance bond is paid out to the employer, can the contractor claim the proceeds of the performance bond in adjudication proceedings commenced under the Construction Industry Payment and Adjudication Act 2012 (“CIPAA 2012”) against the employer?

This issue was discussed by a Malaysian High Court case of Setia Fontaines Sdn Bhd v Pro Tech Enterprise Sdn Bhd and another case [2022] MLJU 2865.

Brief Facts: Pro Tech was appointed by Setia Fontaines as the main contractor for the construction and completion of 2-storey office building in Penang. As a result of the disputes between the parties, Pro Tech commenced adjudication proceedings under the CIPAA 2012 against Setia Fontaines and made, amongst others, the following claims in the adjudication proceedings:

(i) payment for three (3) outstanding invoices in the total sum of RM108,453.66;

(ii) return of the sum of RM889,020.88 being the Performance Bond paid out to Setia Fontaines pursuant to the alleged wrongful call on the same;

(iii) a sum of RM624,405.91 as loss and expenses;

(iv) a sum of RM1,384,531.02 under Progress Claim No. 16R; and

(v) a total sum of RM2,422,892.17 for items (i) to (iv) hereinabove after deducting the sum of RM583,519.30 which was admitted by Setia Fontaines in its Payment Response.

Adjudication Decision: The adjudicator made the decision, amongst others, that Setia Fontaines shall pay Pro Tech the sum of RM2,422,892.17, after deducting for RM583,519.30 as admitted by Setia Fontaines. This was recorded as the Adjudicated Amount of this decision which included the payment for loss & expense and Performance Bond.

The Court in this case referred to the Singapore High Court case of China Railway No 5 Engineering Group Co Ltd Singapore Branch v Zhao Yang Geotechnic Pte Ltd [2019] 5 SLR 422 where it was held in the Singapore case as follows:

“… a payment claim for performance bond proceeds flies in the face of clear statutory wording, which stipulates that entitlement to progress payment (from which a payment claim results) is premised on work done or goods or services being supplied. While the performance bond relates to the construction works, a call on the performance bond resulting in the main contractor receiving the bond proceeds cannot be considered as works done by the subcontractor, which is a fundamental requirement under s. 5 SOPA. On the contrary, the performance bond is usually called as a result of some alleged breach of the contract and it includes an alleged failure by the subcontractor to carry out construction works, or supply goods or services, in accordance with the terms of the construction contract …”

Conclusion: The Court applying the principles from the abovementioned Singapore High Court case and other cases cited by the counsel, held that the learned adjudicator had no jurisdiction to consider, let alone allow, Pro Tech’s claim in respect of the Performance Bond as it is not a Payment Claim relating to a construction contract pursuant to CIPAA 2012. The Court concluded that the calling on the performance bond and the receipt of bond proceeds cannot be considered as work done by the contractor.

In short, a claim by a contractor for the proceeds of a performance bond that has been paid out to an employer is not a claim for work done for the purposes of adjudication pursuant to CIPAA 2012.

13.10.2023