Cross-Claim in Adjudication: Overview of the Court of Appeal’s decision in Tera VA Sdn. Bhd. v Ayam Bintang Istimewa Sdn. Bhd.

Cross-Claim in Adjudication: Overview of the Court of Appeal’s decision in Tera VA Sdn. Bhd. v Ayam Bintang Istimewa Sdn. Bhd.

Introduction

The principle of crossclaims is a well-established aspect of Civil Litigation. Upon receipt of a claim from an aggrieved Party A, the receiving Party B is required to submit a formal response, which may not only include Party B’s assertion of defences but also include a crossclaim against Party A. The crossclaim allows Party B to take on the role of a claimant, effectively reversing the situation and seek damages from Party A. This counterclaim would be a set-off/reduction of the sums payable by Party B to Party A or may even result in Party A being required to pay Party B instead.

However, the question arises as to whether this principle is wholly applicable within the framework of adjudication claims, which are typically governed by distinct statutory provisions and procedural guidelines i.e. the Construction Industry Payment and Adjudication Act 2012 (“CIPAA 2012”). The Court of Appeal in Tera VA Sdn Bhd v Ayam Bintang Istimewa Sdn Bhd[1] addressed this very issue, holding that a crossclaim in the context of adjudication claims can only reduce or zerorise and cannot exceed the original claim sum.

This article outlines the facts leading up to the appeal, the appellate court’s findings on crossclaims and the broader implications in relation to adjudication claims.

Background

Relationship and Agreements

In 2011, Ayam Bintang Istimewa Sdn Bhd (“ABI”) appointed Tera Va Sdn Bhd (“TV”) to supply, deliver and install a Solar Photovoltaic Solution (“SPS”) at a factory in Kuantan, Pahang (“Premise”) pursuant to two quotations signed by ABI on 11 August 2021 (“Agreements”).

Dispute

TV contended that ABI had failed to pay for work done amounting to RM294,750.00 and has therefore breached the Agreements. ABI countered that TV had refused and/or omitted to fulfil/complete its duties and obligations in the Agreements, in failing to exercise its duty of care during the installation and/or construction of the solar panel at the Premise leading to structural damage to the zinc roof panels measuring 20,565sqft.

Adjudication Proceedings

On 16.12.2022, TV issued its payment claim against ABI for unpaid work done in the sum of RM294,750.00. On 30.12.2022 ABI’s payment response included a set-off claim of RM695,580.00. ABI maintained this set-off in its adjudication response, as the costs incurred by ABI to replace the existing damaged roofing. The Adjudicator then decided that TV had not only failed in their overall claim but further decided that a sum of RM7,830.00 was instead to be paid by the claimant, TV to the respondent, ABI.

High Court Proceedings

ABI applied to the High Court to enforce the adjudication decision. TV concurrently applied to set aside the same, premised on two limbs being fraud[2] and denial of natural justice[3]. Both issues were brought before the learned High Court Judicial Commissioner (“JC”).

Fraud

TV alleges that ABI had fraudulently misled the adjudicator into believing the entire roof had been damaged and that it had replaced the roof and paid for the cost. TV produced photographs showing no replacement work carried out and minimal damage. The JC however, found these photographs to be lacking both clarity and evidential value, dismissing the allegation.

TV’s subsequently raised the issue that ABI had fraudulently concealed the fact that it was only renting the premise and had no ownership of it. This issue was also dismissed when the JC found that even as a tenant, ABI will still have to make good of such damages at its own costs as the terms and conditions of a tenancy agreement clearly imposes a duty of care on the tenant.

Denial of Natural Justice

The next ground raised to set aside the adjudication decision was also dismissed. The adjudicator was said to have decided on a matter not submitted by the parties (rate for the cost of rectification) and had come to a conclusion without giving TVA the opportunity to address the matter. The JC stated that since the rate was provided by ABI in the adjudication response, TVA could have responded in its adjudication reply and was therefore not denied any right to be heard. It was also observed that the adjudicator had deliberated on all the issues raised and allowed both parties their opportunities to state their case.

Having held that there was no “fraud” nor was there a “denial of justice”, the JC dismissed the setting aside, resulting in TV’s filing of the appeal.

Court of Appeal

The Court of Appeal observed the JC’s decisions, the arguments raised by parties and upheld the decision of the High Court, namely that TV has not proven that the adjudication decision was improperly procured through fraud nor that there has been a denial of natural justice.

However, the Court of Appeal went a step further and held that its findings thus far did not end the matter. In view that the effect of the adjudication decision is that TV (being the claimant) ends up being ordered to pay ABI (being the respondent), the appellate court saw the need to go address the issues in regards to counterclaims in adjudication proceedings as follows:

  1. Whether ABI, being the respondent, in responding to TV’s adjudication claim can file a crossclaim and if so, whether the crossclaim can exceed TV’s claim thereby making ABI the substantive claimant

It was not disputed that ABI can file a crossclaim to resist TV’s claim but the Court of Appeal additionally took the view that the crossclaim can only reduce or zerorise TV’s claim. In support of this, the Court of Appeal refers to the High Court case of Mudajaya Corporation Bhd v KWSL Builders Sdn Bhd and other cases[4] which held that even if it is assumed that the respondent can set off and/or counterclaim against a claimant in an adjudication proceeding, the respondent can only zeroise the claim and cannot counterclaim from the claimant for an amount which exceeds the sum claimed in the adjudication proceedings. The reasons provided are reiterated as follows:

  • the wording in section 6(2) of CIPAA 2012 only allows a respondent to, at the most, dispute ‘wholly’ the claim in an adjudication proceedings;
  • by virtue of section 27(1) of CIPAA 2012, an adjudicator’s jurisdiction is ‘limited’ to matters referred to adjudication by the parties in, among others, the payment response. If a respondent, at the most, can only zeroise a claim in an adjudication proceeding under section 6(2) of CIPAA 2012, according to section 27(1) of CIPAA 2012, the adjudicator cannot then have jurisdiction to adjudicate a counterclaim by the respondent which exceeds the amount in the payment claim;
  • section 10(1) of CIPAA 2012 only allows a respondent to serve an adjudication reply which ‘shall answer’ an adjudication claim. There is nothing in section 10(1) of CIPAA 2012 which permits a respondent to counterclaim from the claimant for a sum which exceeds the sum claimed in the adjudication proceedings; and
  • the objective of CIPAA is to assist the cashflow of parties who have performed construction work. It is not the purpose of CIPAA to enable parties to claim for damages for breach of construction contracts and/or torts regarding construction work. This objective is not attained if a respondent is permitted to counterclaim from the claimant for a sum which exceeds the amount claimed in the adjudication proceedings. This is because if an adjudicator is allowed to adjudicate a respondent’s counterclaim sum which is in excess of the amount claimed in the adjudication proceedings, this will result in a protracted and costly adjudication proceedings.

The appellate court conclusively held that:

“Under the circumstances, ABI can never be the substantive claimant.”[5]

  1. Whether such a crossclaim can be based on breaches — breach of contract or negligence

The Court of Appeal then held in reference to View Esteem Sdn Bhd v Bina Puri Holdings Bhd[6], that the crossclaim has to be within the jurisdiction of the adjudicator[7] so that he adjudicates only the subject matter pursuant to the payment claim and the payment response exchanged between parties.

In this regard, the Court of Appeal found that ABI would have satisfied the requirement of connection between the claim and crossclaim as both are related to the claim on completion of work and arises from the same contract.

In totality, the Court of Appeal’s findings are as follows:

  1. the grounds relied upon in TV’s setting aside application was insufficient and unsubstantiated to allow for a setting aside and therefore the High Court’s decision to dismiss the same was upheld; and
  2. the adjudicator had acted in excess of jurisdiction when taking into account ABI’s counterclaim which has exceeded TV’s claim.

However, even though there was an excess of jurisdiction, ABI never relied on such grounds in its setting aside application, nor was the issue raised in the memorandum of appeal. Therefore, the appeal was dismissed and with ABI having to bear the costs of the appeal.

Significance and Implications of the Count of Appeal Ruling

The main takeaway from this decision is as follows: based on the overall broader objective of CIPAA 2012, a counterclaim in adjudication proceedings cannot be in excess of the original claim. Such a counterclaim would not only go against the clear statutory provisions of CIPAA 2012 which only allows the respondent to ‘wholly’ dispute the adjudication claim and would also but also fail the objective of CIPAA i.e. to assist the cashflow of parties who have performed construction work and provide a faster and more efficient means of settling payment disputes in the construction industry.

As seen above, an adjudicator who allows a crossclaim that exceeds the sum claimed in the payment claim, acts in excess of jurisdiction. Any crossclaims exceeding such payment claims will have to be directed to arbitration or the Courts for resolution.

Conclusion and final thoughts

Here is a rare but clear example of the appellate court’s opinion that the strict rules and processes outweigh public policy. There is argument to be made whereby the appellate courts should not have dismissed the appeal despite the technical non-compliance as the result of such a decision is effectively, the enforcement of a faulty or illegal adjudication decision.

The general stance of Malaysian Courts in the current era usually leans in favour of public policy despite any technical non-compliance. This is evident for example in the Federal Court case of Ann Joo Steel Bhd v Pengarah Tanah dan Galian Negeri Pulau Pinang & Anor and another appeal[8] which held that a court can take judicial notice of matters that are ex-facie illegalities or nullity as what is illegal, null and void cannot be turned legal by consent or waiver of the parties.

However, until another ruling is made on this point of law in the Federal Court, this case will remain good law.

If you have any questions, please contact our Head of Projects & Infrastructure, Mr. Kevin Richard Nathan  (kevin@nzchambers.com), or our Associate, Projects and Infrastructure, Mr. Ow Kai Wing.

Authors:

  1. Kevin Richard Nathan
  2. Ow Kai Wing

References:

[1]    [2024] 6 MLJ 849.

[2]    Section 15(a), CIPAA 2012.

[3]    Section 15(b), CIPAA 2012.

[4]       [2022] MLJU 1931

[5] Tera VA (supra) @ paragraph [69]

[6] [2018] 2 MLJ 22

[7] section 27(1) of the CIPAA

[8] [2020] 1 MLJ 689