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I Understand

CIPAA – should one issue a payment response in reply to a payment claim?

January 2019

by Janet Chai Pei Ying

The decision of the Federal Court in the case of View Esteem Sdn Bhd v Bina Puri Holdings Bhd1 saw the overturning of the steadfast rule that previously had one reacting to payment claims lodged by the unpaid party.

Previously, a lack of payment response would have affected the jurisdiction of an adjudicator to deal with counterclaims and defences brought by the non-paying party. That is, a lack of payment response previously would have forbidden an adjudicator from dealing with the defences, set offs and counterclaims raised for the very first time in the adjudication response. This was held to be the case based on section 27 of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”), which limits the jurisdiction of an adjudicator to only matters raised in the payment claim and payment response.

For this reason, previously, the payment claim and payment response were treated by the courts as pleadings in adjudication proceedings and the courts have held that the rules of procedure in civil litigation which binds parties to their pleadings apply to the payment claim and payment response in adjudication, and in this regard, the matters for adjudication before an adjudicator would be confined to only matters that were raised in the payment claim and response.2 Therefore, unless a point of defence was raised in the payment response, the paying party will not be able to rely on the defence when raised for the very first time in adjudication response.

Further, the courts also previously found as an explanation to section 6(4) of CIPAA that the absence of payment response meant that the unpaid party as a claimant in the adjudication proceedings will only be required to prove the matters raised in the payment claim without having to meet any onus of proof which, in a defended payment disputed through the payment response, would shift back to the unpaid party or claimant.

The Federal Court’s decision in View Esteem has changed the law in this area completely as follows:-

  1. The adjudicator’s jurisdiction under section 27(1) of CIPAA which is limited to the matter referred to adjudication pursuant to ss 5 and 6 refers to the ‘identification of the cause of action’ as required under section 5(2)(b) of CIPAA.
  2. The payment response under section 6 of CIPAA is defined and limited by the claim under section 5 of CIPAA.
  3. Therefore, section 27(1) refers to the subject matter of the claim which is the ‘cause of action’ identified by the claimant.
  4. In the absence of a prohibitory clause (which can be found in the statutory adjudication legislation in Singapore and New South Wales, Australia), there is no impediment for the adjudicator to consider all the grounds of claim in an adjudication claim under section 9 and all the grounds of defence in an adjudication response under section 10.

The Federal Court did not explain the language in section 6(2) which provides that a non- paying party who disputes the amount claimed shall serve a payment response stating the amount disputed and the reason for the dispute.

Instead, the Federal Court held that the significance of the ‘deeming’ effect in section 6(4) of CIPAA should not be down played. That the interpretation that section 6(4) of CIPAA would only entitle the non-paying party to dispute the claim as it stands without raising any positive defence is to whittle down the effect of the deeming provision.

The Federal Court found that the failure of the adjudicator to consider the defences set out in the adjudication response, albeit they were not raised in the payment response, to be a breach of natural justice.

In view of the Federal Court’s decision, a non-paying party will no longer be in a hurry to respond to a payment claim initiated under CIPAA. In fact, it is queried whether a payment response will be issued at all given that an unpaid party would be able to raise arguments of estoppel and afterthought to oppose a defence omitted in a payment response and raised for the very first time in an adjudication response.

It is this author’s view that the Federal Court has omitted to deal with the mandatory language used in section 6(2). Further, the decision may lead to more adjudication proceedings being commenced given that the unpaid parties would no longer have the benefit of a payment response (in the initial stages) as to the reasons why a non-paying party was not making payment. This would ultimately stretch the process to recover the unpaid amounts relating to a construction contract and result in higher cost to the unpaid party in trying to recover the unpaid amounts under CIPAA.

This material is for general information only and is not intended to provide legal advice. If you have any queries regarding the above, please feel free to contact us at insights@chooi.com.my.

1[2018] 2 MLJ 22.

2Milsonland Development Sdn Bhd v Macro Resources Sdn Bhd & Other Case [2017] 8 MLJ 708; Terminal Perintis Sdn Bhd v Tan Ngee Hong Construction Sdn Bhd & Other Case [2017] 1 LNS 177; Teguh Wiramas Sdn Bhd v Thien Seng Chan Sdn Bhd & Other Case [2017] 1 LNS 619; Wong Huat Construction Co v Ireka Engineering & Construction Sdn Bhd [2018] 1 CLJ 536; SQA Builders Sdn Bhd v Luxor Holdings Sdn Bhd & Another Case [2017] 1 LNS 796; Binastra Ablebuild Sdn Bhd v JPS Holdings Sdn Bhd and Another Case [2018] 2 CLJ 223.