Back-to-Back Payment Provisions Are Regarded As Conditional Payment Provisions Under CIPAA [1]
By Datin Chu Ai Li, Partner of Azman Davidson & Co.
Construction professionals in Malaysia will almost certainly have come across the term “back-to-back” [2]. This “back to back” term is commonly found in the payment terms of letters of award issued by main contractors to sub-contractors.
A “back-to-back” payment term was considered by the High Court in the recent case of Khairi Consult Sdn Bhd v GJ Runding Sdn Bhd [2021] MLJU 694. This case involves a contract between a main consultant and its sub-consultant. GJ Runding Sdn Bhd was the engineering main consultant for the construction of a road from Nilai-Labu to Bandar Enstek/KLIA (“the Project”). GJ Runding Sdn Bhd (“GJ Runding”) appointed Khari Consult Sdn Bhd (“Khairi Consult”) as its sub-consultant in respect of design of two bridges to be built over railway tracks for the Project. The term for payment in the letter of appointment of the sub-consultant was drafted as follows:
“9. Payment
Payment shall be on a back to back basis i.e. (Khairi Consult) shall be paid within 7 days upon (GJ Runding) received payment from the client.” (“Clause 9”)
After Khari Consult completed its work, GJ Runding made two part-payments to Khari Consult for its sub-consultancy fee, leaving a balance of RM839,478.17.
The letter of appointment of the sub-consultant was issued after the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) came into effect, which meant CIPAA applied to the contract between GJ Consult and Khari Consult[3]. However, Khairi Consult did not opt for adjudication proceedings under CIPAA but opted to commence a court action to recover the balance sub-consultancy fee against GJ Runding.
One of the issues raised in the court action was whether Clause 9 was void according to Section 35(1) and (2)(a) of CIPAA. Section 35(1) and (2)(a) of CIPAA provides as follows:
“Prohibition of conditional payment
35 (1) Any conditional payment provision in a construction contract in relation to payment under the construction contract is void.
(2) For the purposes of this section, it is a conditional payment provision when –
(a) the obligation of one party to make payment is conditional upon that party having received payment from a third party; or”
The learned High Court Judge held that Clause 9 was void under s 35(1) and (2)(a) CIPAA because Clause 9 provided for GJ Runding’s payment of fee to the Plaintiff to be on a “back to back” basis, namely GJ Runding was only required to pay the fee to Khairi Consult when GJ Runding has actually received payment from the employer. Hence, Clause 9 was a “conditional payment provision” within the meaning of s 35(1) and (2)(a) CIPAA because GJ Runding’s obligation to make payment was conditional upon it having received payment from a third party (the employer).
The High Court decision in Khairi Consult Sdn Bhd v GJ Runding Sdn Bhd in respect of the application of Section 35 of CIPAA is significant in two respects.
First, the High Court applied Section 35 of CIPAA to invalidate a payment provision in a construction contract outside adjudication proceedings under CIPAA. This was a departure from the decision of another High Court in Bond M&E (KI) Sdn Bhd v Isyoda (M) Sdn Bhd[2017] MLRHU 1 which held that section 35 of CIPAA renders a conditional payment provision void only for the purpose of adjudication under CIPAA.
Secondly, the High Court’s approach of interpreting the back-to-back provision in Clause 9 as making the main consultant’s obligation to make payment conditional upon it having received payment from a third party appears to differ from the approach taken by the Federal Court in respect of a provision with similar wording. In the case of Globe Engineering Sdn Bhd v Bina Jati Sdn Bhd [2014] 7 CLJ 1, the Federal Court considered the payment provision in paragraph 14 of the letter of award that was worded as follows:
“Payments – Back to back basis. Within seven days upon [the contractor] receiving from [the employer].”
The Federal Court recognised that there was a distinction between provisions that made timing for payment contingent upon receipt of payment and provisions that made liability for payment contingent upon receipt of payment. The Federal Court interpreted paragraph 14 as having made the time for payment contingent upon the time the contractor would receive payment from the employer and held it did not make the contractor’s liability to pay contingent upon receipt of payment. The Federal Court did not consider Section 35 of CIPAA – CIPAA did not apply in that case because the sub-contract was made many years before CIPAA came into effect.
In contrast with the detailed approach taken by the Federal Court for the interpretation of back to back payment provisions, the High Court in Khairi Consult Sdn Bhd v GJ Runding Sdn Bhd appears to have taken a broad-brush approach to regard even payment provisions making time for payment contingent upon receipt of payment as “conditional payment provisions” under Section 35 of CIPAA. This case appears to be continuation of a trend for the Courts to interpret Section 35 of CIPAA in the widest possible sense to capture all forms of conditional payment provisions[4].
In conclusion, the Malaysian Courts appear to have adjusted their approach to interpreting back-to-back payment provisions with the advent of CIPAA. The Courts will most likely regard all back-to-back payment provisions to be “conditional payment provisions” under Section 35 of CIPAA and hold such provisions as void.
[1] CIPAA is the acronym for Construction Industry Payment and Adjudication Act 2012.
[2] In its ordinary dictionary meaning, “back-to-back” means “happening one after another, with nothing in between, refer to https://dictionary.cambridge.org/dictionary/english/back-to-back
[3] Section 4 of CIPAA defines “construction contract” as construction work contract or construction consultancy contract, and defines “construction consultancy contract” as a contract to carry out consultancy services in relation to construction work and includes planning and feasibility study, architectural work, engineering, surveying, exterior and interior decoration, landscaping and project management services.
[4] Refer to Lion Pacific Sdn Bhd v Pestech Technology Sdn Bhd [2020] MLJU 230; Ireka Engineering & Construction Sdn Bhd v TRI Pacific Engineering Sdn Bhd [2020] MLJU 548; Terminal Perintis Sdn Bhd v Tan Ngee Hong Construction Sdn Bhd [2017] MLJU 242; Econpile (M) Sdn Bhd v IRDK Ventures Sdn Bhd & another case [2016] 5 CLJ 882; BM City Reaalty & Construction Sdn Bhd v Merger Insight (M) Sdn Bhd [2016] 1 LNS 1096.