THE LIMITATIONS OF ADJUDICATION

by Mr Chan Kheng Hoe, Head of Construction Law, Chong + Kheng Hoe

Hiform (M) Sdn Bhd v Pembinaan Bukit Timah Sdn Bhd and another case (2020) was an interesting case which clarified some limitation to the process of adjudication.

Facts

Pembinaan Bukit Timah Sdn Bhd (“PBT”) was the main contractor for a residential project in Putrajaya. PBT in turn appointed Hiform (M) Sdn Bhd (“Hiform”) as its subcontractor to supply labour, materials, machineries, equipment and tools for the reinforced concrete work.

The subcontract contained the usual clause that allows the main contractor to appoint third parties to carry out the subcontract works and to recover such third party costs from the subcontractor. Liquidated damages for delay was fixed at RM32,500.00 per day.

Arising from disputes between PBT and Hiform, Hiform withdrew from the project on 8 March 2018. PBT thereafter took over Hiform’s works and on 24 December 2019, commenced adjudication against Hiform for the third party costs arising from Hiform’s withdrawal. PBT also included its claim for liquidated damages in the adjudication.

The adjudicator decided in favour of PBT to the sum of RM4.5 million being additional costs and RM10.4 million in respect of liquidated damages. Dissatisfied, Hiform applied to set aside the adjudication decision.

Arguments by parties

Hiform argued that PBT’s claim was not in fact a claim for payment pursuant to the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”). Essentially, it is contended that the adjudicator lacked “core jurisdiction” for having decided on a subject matter which “the Act has (not) conferred on the Adjudicator” (Terminal Perintis Sdn Bhd v Tan Ngee Hong Construction Sdn Bhd and another case, 2017).

The same argument was in fact raised before the adjudicator but was decided in PBT’s favour.

Decision of the Court

In respect of jurisdictional challenges, the High Court is neither shackled nor fettered by the adjudicator’s determination, and can always revisit the issue (Giatreka Sdn Bhd v SGW Engineering Construction Sdn Bhd (and another Originating Summons), 2020).

In respect of liquidated damages, it has already been decided in BM City Realty & Construction Sdn Bhd v Merger Insight (M) Sdn Bhd and another case (2016) that liquidated damages constitute a “damages calim which would not fit into the definition of a ‘payment claim’ that is susceptible to adjudication under CIPAA”.

Not only liquidated damages, but every extra-contractual claims including tortious claims or general damages arising from breaches of contract would be excluded from CIPAA (Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd & Another Appeal, 2019).

Having taken the above cases into consideration, the learned Judge held that CIPAA is only applicable for claims for “debt or damages for unpaid work done and/or services rendered under the express terms of the construction contract which form part and parcel of the consideration (see 2(d) Contracts Act 1950) payable thereunder. However, unpaid debt or damages which arose from breach of the contract is not encapsulated notwithstanding that it may also have been expressly provided for in the construction contract.”

Therefore, in considering whether a payment is claimable under CIPAA, distinction needs to be drawn between claims that form part of the consideration versus claims that arise due to breach of contract. Only the first instance would be claimable under CIPAA, however, the second category of claims can be used as a “cross claim of defence”.

The Adjudication decision was therefore set aside.

Conclusion

It is not every claim arising out of a construction contract which can be adjudicated under CIPAA. This is so even if there are express terms in the contract that provides for it. A simple way to consider whether a claim can be adjudicated under CIPAA would be to ask:

1. Is this a claim for payment arising from performance of the contract? In which case, it probably can be claimed under CIPAA; or
2. Is this a claim for payment arising from failure to perform the contract? In which case, it probably cannot be claimed under CIPAA.