CP Is Pay when certified the same as Pay when paid

Is “Pay when certified” the same as “Pay when paid”?

by Ms Jolin Yew Chee It, Senior Legal Associate, Messrs. Jeff Leong, Poon & Wong’s Dispute Resolution practice.

 

The Court of Appeal recently in Lion Pacific Sdn Bhd v Pestech Technology Sdn Bhd and another appeal [2022] MLJU 2109 set aside a High Court’s decision which held that a “pay when certified” clause is tantamount to conditional payment and will be void under Section 35 of the CIPAA, as it is not limited to “pay when paid” clauses only.

Background

Lion Pacific Sdn Bhd (“Lion Pacific”) was appointed by a consortium as the subcontractor for the System Works Package parcel of a construction project (“Works”). In turn, Lion Pacific engaged Pestech Technology Sdn Bhd (“Pestech”) as its subcontractor for the Works (“Sub-Contract”).

Pestech commenced an adjudication proceeding against Lion Pacific and the adjudication decision was in favor of Pestech.

In High Court, Pestech’s application to enforce the adjudication decision was allowed, whereas Lion Pacific’s application to stay and/or set aside the adjudication decision was dismissed.

Core Issues

  1. Whether CIPAA has no application to the Sub-contract since the main contract (which forms part of the Sub-contract) was entered into prior to the coming into force of CIPAA.
  2. Whether the adjudicator had acted in excess of his jurisdiction by incorporating new non-existent contractual term into the Sub-contract.
  3. Whether there were manifest errors in the adjudication decision.

Issue No. 1

Lion Pacific contended that the adjudication decision was null and the High Court had came to an erroneous finding that the adjudicator has jurisdiction to decide the payment claim submitted by Pestech based on the grounds, among other things, that:

  1. Pestech is fully aware that the contract entered into between the Government of Malaysia and the consortium and the contract entered into between the consortium and Lion Pacific were entered prior to CIPAA coming into force.
  2. The terms and conditions (“T&C”) of the main contract are equally applicable to the Sub-Contract between Pestech and Lion Pacific pursuant to the T&C of the Sub-Contract.
  3. Under the Sub-Contract, Pestech was made a party to the main contract which means that the main contract applies to all disputes between the parties to the Sub-Contract, when both the contracts formed part of the same series of transactions.
  4. As Pestech had knowledge that the main contract applied to both the above parties, Pestech is deemed to be a party to the main contract.
  5. As the main contract came into existence before CIPAA came into force, any payment dispute under the Sub-Contract cannot be referred to the adjudicator pursuant to CIPAA rendering the adjudicator being devoid of jurisdiction to adjudicate the dispute.

It is indisputable that CIPAA is prospective in nature and would not apply to contracts entered into prior to CIPAA coming into force – see Federal Court case of Jack-In Pile (M) Sdn Bhd. v Bauer (Malaysia) Sdn. Bhd. & Another [2020] 1 CLJ 299.

On the other hand, Pestech contended that the date of execution of the main contract is irrelevant to the adjudication proceedings and that the date of the Sub-Contract should be the only relevant date for consideration as to whether CIPAA applies as the adjudication proceedings arose out of the Sub-Contract.

The Court of Appeal held in favor of Pestech and concluded that CIPAA applies to the Sub-contract on the following reasons:

  1. The main contract and the Sub-contract are separate contracts with only one common party.
  2. Pestech’s payment claim was based on the Sub-Contract which was concluded after CIPAA came into force.
  3. All the rights and obligations of Pestech and Lion Pacific arose solely from the Sub-Contract (not the Main Contract).
  4. The mere fact that Clause 3.1 of the Sub-contract had incorporated all the provisions of the main contract into the Sun-Contract did not mean that Lion Pacific and Pestech had entered into the main contract.

Issue No. 2

Lion Pacific contended that –

  1. the adjudicator has decided that the certification mechanism as agreed between the parties is a mechanism which is prohibited by Section 35 of the CIPAA (prohibition of conditional payment, e.g. “pay when paid” clause); and
  2. pursuant to the Sub-Contract, the certification by the Ministry of Transportation (“MOT”) is required to confirm whether Pestech had in reality completed its works (Clause 4.1 of the Sub-Contract) prior to any payment made to Pestech.

The question for determination is whether the said certification was purely to determine the works carried out by Pestech and should not be regarded as a provision for conditional payment.

The Court of Appeal held in favor of Lion Pacific, whereby Clause 4.1 is not invalidated by Section 35 of the CIPAA for reasons that:

  1. The adjudicator has exercised his powers in excess of jurisdiction when he erroneously concluded that Section 35 of the CIPAA applies to not just “pay when paid” provision but also to “pay when certified” provision, therefore Clause 4.1 cannot apply despite this clause not being a “pay when paid” provision.
  2. The adjudicator’s misconstruction of the term “pay when certified” as being “pay when paid” which is prohibited as a conditional payment also amounted to the incorporation of a new non-existent contractual term into the Sub-Contract to which the parties had not mutually agreed and the purported “pay when paid” clause was never in existence.
  3. There was no default by Lion Pacific in making payment to Pestech as Lion Pacific is only obliged to make payment to Pestech upon certification of the work done by MOT as expressly provided in Clause 4.1 to which the High Court ought to have given effect as a mutually agreed term.
  4. Notwithstanding the object of CIPAA being to facilitate prompt payment, the contractual obligations of the parties as expressly agreed upon cannot be disregarded.
  5. Section 35 of the CIPAA was not intended to replace the certification or valuation to assess the progress of works carried out by the relevant authority for payment to be affected.

Issue No. 3

Lion Pacific claimed that there was purported denial of natural justice to Lion Pacific by the adjudicator premised on the grounds, among other things, that –

  1. the adjudicator’s failure to appreciate that there was an absence of the certification from MOT and proceeded to make an award in favour of Pestech based on a “pay when paid” clause;
  2. the adjudicator had unilaterally incorporated new non-existent term into the contract between the parties, which was never agreed upon by the parties; and
  3. Lion Pacific was never asked to address the proceeding on the core issue that was material to the adjudicator’s final decision.

The Court of Appeal concurred with Lion Pacific’s position that the High Court had also not appreciated the adjudicator’s failure to consider the fundamental element of Lion Pacific’s defence, namely, the non-entitlement of Pestech to its claim without certification by the MOT; and the certificate issued by Lion Pacific was only at the request of Pestech for securing financing and not for work done, which was the basis of the payment claim for which evaluation and certification by the approving authority was crucial.

Therefore, the Court of Appeal had allowed Lion Pacific’s appeal; and set aside the decision of the High Court and the adjudication decision.

Commentary

This decision confirms that CIPAA is applicable to construction contracts (including sub-contracts) entered into after CIPAA came into force on 15.4.2014.

This is also an interesting decision by the Court of Appeal as it affirms the position that a clause requiring payment to be conditional upon certification is not a conditional payment clause prohibited under Section 35 of the CIPAA.

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