• Introduction
The Construction Industry Payment & Adjudication Act 2012 (“CIPAA”) introduces a significant shift in handling unpaid claims by allowing Subcontractor to pursue direct payment from the Principal, even in the absence of a direct contractual relationship.
This direct payment mechanism may be unsettling for Principal, as Section 30 of CIPAA imposes potential financial liabilities outside their direct contractual obligations. Such mechanism represents an exception to the traditional doctrine of privity of contract.
• What are the conditions required to be fulfilled by the Subcontractor in order to invoke Section 30 of the CIPAA?
The principles governing Section 30 of the CIPAA are expounded in the case Cabnet Systems (M) Sdn Bhd v Dekad Kaliber Sdn Bhd & Anor.[1] In summary, to successfully invoke Section 30 of the CIPAA, the Subcontractor must fulfil the following conditions:
- There must be an adjudication decision issued ordering the unsuccessful party (typically, the Main Contractor) to pay the successful party (typically, the Subcontractor);[2]
- The Main Contractor has failed to pay the Subcontractor the adjudicated amount;[3]
- The Subcontractor has made a written request for the Principal to pay the adjudicated amount directly to the Subcontractor;[4]
- There is a sum of money due and owing from the Principal to the Main Contractor;[5] and
- The Principal has not complied with the Subcontractor’s written request by paying the Subcontractor directly.
Given these conditions, the Principal might be contemplating:
- What are the potential consequences if the Principal fails to respond to the Subcontractor’s written request?
- What if there is no money due and owing from the Principal to the Main Contractor?
- Is the Principal compelled to pay the Subcontractor upon receipt of the written request?
These issues were addressed in the Court of Appeal case of JDI Builtech (M) Sdn Bhd v Danga Jed Development Malaysia Sdn Bhd (previously known as Greenland Danga Bay Sdn Bhd)[6] (“JDI”), which will be discussed in detail below.
The Court of Appeal case of JDI Builtech (M) Sdn Bhd v Danga Jed Development Malaysia Sdn Bhd (previously known as Greenland Danga Bay Sdn Bhd)
Brief Facts:
The appellant (Subcontractor) obtained an adjudication decision in its favour against the Main Contractor. The Subcontractor subsequently sought direct payment under Section 30 of the CIPAA from the Principal, believing that there was an outstanding sum owed from the Principal to the Main Contractor.
The Principal contended that no debt was owing to the Main Contractor, as the contract with the Main Contractor had been terminated for various breaches including wrongful suspension of works, failure to proceed with the works regularly and diligently and failure to complete the works within time.
The High Court, after evaluating the evidence, dismissed the Subcontractor’s application for direct payment. The Court found that the Subcontractor had failed to establish that there was money due from the Principal to the Main Contractor. Specifically, at the time the Principal received the Subcontractor’s demand for direct payment, the Principal and the Main Contractor were still finalising their accounts to determine whether there is any money due or payable to the Main Contractor, and hence, there was yet a sum of money ‘due or payable’ from the Principal to the Main Contractor.
The Subcontractor, dissatisfied with the decision, appealed to the Court of Appeal.
The Court of Appeal dismissed the Subcontractor’s appeal and upheld the High Court’s decision.
The Court of Appeal’s decision highlights several crucial points regarding the application of Section 30 of the CIPAA:
1. Section 30(5) of the CIPAA must be satisfied before a direct payment order can be made
The Court of Appeal emphasised that Section 30(5) of the CIPAA forms the foundational basis for the deployment of the other subsections in Section 30 of the CIPAA. In other words, before any direct payment order may be made against the Principal, it must first be established that there is a sum of money due or payable by the Principal to the Main Contractor.
The Court clarified that the Principal cannot be made compelled to pay the Subcontractor upon receipt of a written request/notice under Section 30(1) of the CIPAA even if there is no proof of payment by the Main Contractor to the Subcontractor, unless Section 30(5) of the CIPAA is satisfied.
The Court of Appeal further identified two scenarios where there may be no amount due or payable from the Main Contractor at the time the written notice under Section 30(1) of the CIPAA was served:
- The Principal had already paid the Main Contractor; and
- There is a bona fide dispute between the Principal and the Main Contractor at the time the written notice under Section 30(1) of the CIPAA is served.
2. The Subcontractor must discharge the burden of proof to show that there was money due or payable from the Principal to the Main Contractor
The Court of Appeal established that the initial burden of proof to demonstrate that there is a sum of money due and payable from the Principal to the Main Contractor lies with the Subcontractor. Once the initial evidential burden is discharged by the Subcontractor, the burden of proof shifts to the Principal to demonstrate that there is no amount owing by the Principal to the Main Contractor.
In this case, the Court considered a joint inspection report prepared by the quantity surveyor and the Main Contractor to assess the completed and outstanding works. Although the report was not conclusive, it provided contemporaneous evidence of a bona fide dispute between the Principal and the Main Contractor.
3. Previous direct payment arrangement does not create privity between the Principal and Subcontractor
The Court of Appeal held that, although there were previous direct payment arrangements between the Principal and Subcontractor, these arrangements do not impose an obligation on the Principal to continue making direct payments.
Therefore, the Subcontractor cannot rely on past arrangements to justify a direct payment remedy under Section 30 of the CIPAA.
Key Takeaways:
Following the Court of Appeal’s decision in JDI, the key takeaways can be summarised as follows:
- The Principal’s failure to respond to the Subcontractor’s written request under Section 30(2) of the CIPAA is not necessarily fatal to the defence that there is no money due and owing by the Principal to the Main Contractor. The Subcontractor must first demonstrate that there is a sum of money due or payable by the Principal to the Main Contractor at the time the written request was made to the Principal.
- To prove that there is no money due and owing to the Main Contractor, the Principal may adduce credible and contemporaneous evidence of a bona fide dispute with the Main Contractor, such document or evidence need not be final or determinative.
- The Principal should not be made liable for any outstanding debts owed by the Main Contractor to the Subcontractor if there is no money due or payable by the Principal to the Main Contractor.
• Conclusion
While the CIPAA was enacted to alleviate cashflow within the construction industry to assist small time contractors, the Parliament recognised the necessity of balancing the interests of both Subcontractor and Principal. Ensuring support for smaller contractors should not come at the expense of the Principal’s rights and interests.
In the case of JDI, the Court of Appeal held that the Principal should not be held liable for amount due from the Main Contractor to the Subcontractor unless specific conditions are satisfied. The Court emphasised that invoking Section 30 of the CIPAA requires the fulfilment of certain prerequisites and such right does not come automatically.
For personalised legal and compliance support, please reach out to our Projects & Infrastructure Senior Associate, Ms. Elise Tam (elise@nzchambers.com) or Pupil in Chamber, Mr. Alif Mustaqim. We are here to help you achieve compliance and manage these regulatory updates effectively.
Authors:
- Elise Tam
- Alif Mustaqim
Published Date: 12 August 2024
References:
[1] [2020] MLJU 311
[2] Section 30(1) of the CIPAA
[3] Sections 30(1) and (3) of the CIPAA
[4] Section 30(1) of the CIPAA
[5] Section 30(5) of the CIPAA
[6] [2024] 4 MLJ 29