Contracting out of CIPAA 2012?

Following the enforcement of Construction Industry Payment and Industry Act 2012 (CIPAA) on 15 April 2014, the Asian International Arbitration Centre (AIAC) had recorded that there 89.28% of success rate where the CIPAA Adjudication Decision is awarded in the Claimant’s favour.

Understandably, given the high success rate of CIPAA proceeding against the Employer, the Employer would be wary of CIPAA claim against them and the following questions arise:

• Can the Employer expressly exclude the operation of CIPAA 2012 in a construction contract?

• Would a contractual provision which expressly rules out the applicability of CIPAA 2012 is enforceable?

In this case, the High Court clarified that CIPAA, as a statutory adjudication proceeding, cannot be contracted out by the parties. 

As a result, the Unpaid Party’s / Claimant’s right to bring a CIPAA claim cannot be extinguished by virtue of the provision of contract. 

Ranhill E&C Sdn Bhd v Tioxide (Malaysia) Sdn Bhd and Another Case [2015] 1 LNS 1435

Background Facts

The background facts of the case is as follow:

1. Tioxide (Malaysia) Sdn Bhd (“Tioxide“) decided to expand the capacity of its pigment manufacturing plant and entered into 2 agreements with Ranhill E & C Sdn Bhd (“Ranhill“):
   1. Civil Works Contract dated 9.5.2013 where Ranhill agreed to undertake the supply of civil works for the Production Sustainability Project Phase 1 – Cooperas Extraction – Building and Construction for RM7,025,530.78
   2. Contract for Mechanical & Piping Works dated 18.6.2013 for an agreed price of RM8,550,000.00.
2. Payment disputes arose between the parties and Ranhill referred the disputes to 2 CIPAA Adjudication Proceeding respectively.
3. In relation to the Civil Works Contract, Ranhill alleged that the Project Manager had failed to certify a total sum of RM224,304.85. The Adjudicator found in favour of Ranhill and allowed Ranhill’s claim.
4. In relation to the Mechanical & Piping Works, Ranhill alleged that there was a non-payment of Invoice and Interim Payment Certificate No. 10 for RM693,733.54 and the Project Manager had failed to certify IPC No. 11 for RM366,654.04. The Adjudication Decision was rendered in favour of Ranhill where the Adjudicator found that the amount due to Ranhill to be RM1,009,704.88 together with interest and legal costs.
5. Dissatisfied with both of the Adjudication Decisions, Tioxide sought to set aside both of the Adjudication Decisions. One of the grounds raised by Tioxide was that the Adjudicators in both instances had acted in excess of its jurisdiction as there were arbitration agreement in both contracts. As such, it was argued that the arbitration agreement operates to exclude the operation of other forms of dispute resolution, viz-a-viz the CIPAA Proceedings.

High Court: Contracting Out of CIPAA is prohibited!

The High Court explained that CIPAA does not extinguished the parties’ freedom to arbitrate the matter. The rights to refer the disputes to arbitration is still maintained alongside with CIPAA Adjudication.

[38] CIPAA 2012 is clear in recognising that parties wish to keep their contractual dispute resolution choices; and that these choices may be maintained and utilised alongside adjudication. This is obvious from the existence of section 37 which provides for and recognises the concurrent existence of these other remedies. In my opinion, section 37 plainly allows multiple dispute resolution mechanisms to be involved and to operate at the same time. See “Adjudication of Construction Payment Disputes in Malaysia – Navigating the Construction Industry Payment and Adjudication Act” by Chow Kok Fong, Lim Chong Fong and Onn Chee Kheng, [Lexis Nexis 2014], page 300.

– Mary Lim Thiam Suan J (as her Ladyship then was) in Ranhill E&C Sdn Bhd v Tioxide (Malaysia) Sdn Bhd and Another Case [2015] 1 LNS 1435

Having considered the objectives and the rationale of CIPAA 2012, the High Court held that the right to refer to adjudication is a statutory right which cannot be contracted out by virtue of the dispute resolution clause in the contract. The High Court further held that the provisions of CIPAA would prohibit any attempt to expressly contracting out of CIPAA.

[49] I accept that other jurisdictions may have similar application provisions aside from their express provisions prohibiting contracting out. But, given the circumstances and conditions under which CIPAA 2012 came to pass, it is my considered view that the terms of sections 2 and 3 put into effect the intentions of Parliament that the Act is to apply regardless of any contractual arrangements to the contrary. The clear and uncompromising language expresses the terms of Parliament that CIPAA 2012″applies to every construction contract made in writing relating to construction work carried out wholly or partly within the territory of Malaysia” (emphasis added). The Act does not apply only in the conditions provided in section 3. As expressed in the case of Mudajaya Corp Bhd v. Leighton Contractors (M) Sdn Bhd [Kuala Lumpur High Court Originating Summons No. 24C-05-02/2015], even government contracts are not excluded.

…

[55] Hence, I would read the provisions of CIPAA 2012 to prohibit contracting out.

…

[79] There is also a final observation that I feel compelled to make here and it is this. If contracting out was to be allowed and the Courts were to read that as part of Parliament’s intention, the ensuing question may very well be; to which part of CIPAA 2012, all or what the parties choose? There are provisions within CIPAA 2012 that come part and parcel of adjudication and it may undermine the whole object of enacting the legislation in the first place if contracting out was permitted.

[80] In the circumstances, the argument is without merit.

– Mary Lim Thiam Suan J (as her Ladyship then was) in Ranhill E&C Sdn Bhd v Tioxide (Malaysia) Sdn Bhd and Another Case [2015] 1 LNS 1435