Construction law reforms

  • Business
  • Saturday, 11 Jan 2014

Why is the CIPAA delayed?

The construction industry is a significant contributor to our nation’s economy.

One of the key legislations promoted by the industry to address the challenges faced by contracting parties was the passage of the Construction Industry Payment and Adjudication Act 2012 (CIPAA).

With CIPAA, Malaysia joins the United Kingdom, Australia, New Zealand and Singapore as nations that recognise the importance of resolving disputes of payments in a fair, just and expeditious manner.

CIPAA is a form of statutory adjudication which provides a mandate for contracting party aggrieved by payment delays. Normally, any claims by contractors or sub-contractors may be met with contestation by employers of allegations of time delays, defects in workmanship, liquidated damages and losses.

These contests often leave the hapless supplier – contractors with a sense of unfair treatment and render them bereft of remedies for at least interim payments to assuage their cash flows. Anecdotal evidence abounds that withholding, and delaying, of payments have resulted in personal bankruptcies and corporate insolvencies of contractors. This, in turn, leave a trail of business collapses and retrenchment of workers, with the attendant consequences of immense financial and social damage.

The list of major stakeholders who were consulted include the Malaysian Construction Industry Development Board (CIDB), the Master Builders Association Malaysia (MBAM) and the Royal Institution of Surveyors Malaysia (RISM).

The negative effects of high levels of payment defaults have lead to unacceptable consequences to the Malaysian construction sector.

When CIPAA was promulgated and passed in Parliament, it was a legislation that achieved the rare distinction of being welcomed by Members of Parliament across the divide.

The key solution envisaged by CIPAA is the provision of a much faster process of adjudication as compared to arbitration and court litigation, as the time frame stipulated for the resolution of a dispute is 45 days from the receipt of adjudication reply.

The CIPAA covers a whole range of construction works which includes building works, infrastructure works and utilities. It covers also temporary and permanent works. The definition of construction work in CIPAA is wide enough to cover oil and gas, petrochemical, telecommunication, renovation and maintenance of as well as supply of materials, labour and equipment.

CIPAA recognises the unequal bargaining process of contractual risk allocation in construction work context and seeks to rectify and correct the imbalance.

When Australia passed a similar law, it was with these moving words:

“The Government seeks to improve cashflow throughout the entire building and construction industry. In particular, the bill seeks to address the dramatic effect that non–payment has on small sub-contractors, such as bricklayers, carpenters, electricians, plumbers and earth-moving contractors. Many businesses and sub-contractors at this level cannot survive financially when they do not receive regular payment for the work they have done.

“This can have severe consequences to themselves, their businesses and most importantly, their families. The Government is determined to rid the building and construction industry of unacceptable payment practices. In doing so, there is recognition by this government that any action taken does not add unnecessary costs to the industry, its participants and its clients.

“The bill addresses what is commonly known in the building and construction industry as ‘the security of payment problem’. This problem occurs when contractors, sub-contractors and suppliers in the building and construction industry are unable to secure just payment in a timely fashion, or sometimes to get paid at all, for the work supplied, despite in most cases, having the contractual right to that payment.

Because much of the building and construction industry operates under a system of hierarchical contract chains, the industry is particularly vulnerable to security of payment problems. The failure of any one party in the contractual chain to honour its obligations can have a flow- on effect on other parties further down the chain by restricting cash flow and ultimately causing their bankruptcy.”

From the Hansard (April 2, 2012), when CIPAA was debated and passed, similar strong sentiments flowed in speeches of Members of Parliment.

Datuk Yong Khoon Seng (Deputy Works Minister) touted the CIPAA as a panacea to the ills of non-payments in construction industry. He said that this sector, which contributed significantly to GDP, will be shaped by the passage of a Bill that promotes fairness and justice.

It is, therefore, surprising that there is now this inordinate delay in bringing into effect the CIPAA.

Chief Justice

The delay is inexplicable as the industry is well prepared for it. Many professionals have already undergone training to be adjudicators as the Kuala Lumpur Regional Centre for Arbitration (KLRCA) has embarked on Adjudication Course with in depth training and road shows throughout Malaysia. Several learned texts have been written and also launched and lauded by judiciary members, the building fraternity and stakeholders.

Chief Justice Tun Ariffin Zakaria has noted and welcomed the fact that there are adequate adjudicators being trained to discharge their duties under CIPAA.

There has been news that the Government would like some exemptions and that certain carve- outs have been requested. Such carve-outs and exemptions must be examined critically.

Exemptions ought not be such that render the objectives and goals of CIPAA meaningless. CIPAA expressly states that government is also to be bound unless there is expressed exemption gazetted.

The stakeholders in the industry would legitimately become cynical if exemption for government contracts is too wide ranging or ambiguous in its application.

The Government is one of the largest employer. If exemption is made such that the CIPAA goals of righting injustices of non–payment is reduced to nothing, then stakeholders in the construction industry may be left with the strong perception that the government is not sincere or serious in promoting CIPAA.

CIPAA augurs well for the healthy evolution of the industry. Its delay in implementation is retrogressive. Further delays deliver a wrong signal that the Government is not serious in reform and the malaise that plague the industry will not be rectified.

Philip Koh Tong Ngee is senior partner of Mah-Kamariyah & Philip Koh Avocates & Solicitors.

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