Construction Industry Payment & Adjudication (CIPA) Act 2012

1. INTRODUCTION

    1.1 The issue of delayed and non-payment in the construction industry has been long lamented by the Master Builders Association Malaysia (MBAM). Surveys on payment issues carried out by them confirmed that default in payment is the focal problem in the construction industry.

    1.2 During the construction industry roundtable held in June 2003, the Construction of Industry Development Board Malaysia (CIDB) together with other construction industries had identified payment as one of ten priority areas in the Malaysian construction industry.

    1.3 Consequently, Construction Industry Working Group on Payment (WG10) led by
    Institute of Surveyors Malaysia (ISM) was then formed. In June 2004, the group made various recommendations during the construction industry roundtable which chaired by the Honorable Minister of Works. The creation of a Malaysian CIPA is one of the recommendations done by the group.

    1.4 With the vision of WG10 being summarized as "Everyone in the construction industry pays all appropriate amounts due in a timely manner [1] " the objective of eliminating arrears becomes a main KPI of this Act to solve it within an efficient manner.

    1.5 The Kuala Lumpur Regional Centre for Arbitration (KLRCA) will be designated as the official adjudication authority in the country. With this, the centre will establish competency standard and criteria of an adjudicator in the country [2] .

    1.6 On 15[th] July 2009, the Cabinet agreed that CIPA will be enacted to resolve payment problems in construction industry. After several readings has been passed in the Parliament, the CIPA Act was gazetted on 22[nd] June 2012 and applies throughout Malaysia.

2. SCOPE

    2.1 It covers all construction contracts made in writing that relates to construction work carried out wholly or partly within territory of Malaysia including one that is entered into by the Government of Malaysia. This also includes the local and international construction contracts.

    2.2 However, construction contracts entered into by a natural person for any construction work in respect of any building which is less than 4 storeys high will not be applicable[3] .

    2.3 The non-application also goes to construction contracts which are wholly intended for hisoccupation (i.e. residential construction contract).

    2.4 Section 4 of the Act provides two (2) categories of construction contract , that covers under CIPA and they are:-

      2.4.1 construction work contract:

      means a contract to carry out the construction, extension, installation, repair, maintenance, renewal, removal, renovation, alteration, dismantling or demolition of -

        (a) any building, erection, edifice, structure, wall, fence or chimney, whether constructed wholly or partly above or below ground level;

        (b) any road, harbor works, railway, cableway, canal or aerodrome;

        (c) any drainage, irrigation or river control work;

        (d) any electrical, mechanical, water, gas, oil, petrochemical or telecommunication work; or

        (e) any bridge, viaduct, dam, reservoir, earthworks, pipeline, sewer, aqueduct, culvert, drive, shaft, tunnel or reclamation work,

        and includes -

        (A) any work which forms an integral part of, or are preparatory to or temporary for the works described in paragraphs (a) to (e), including site clearance, soil investigation and improvement, earth-moving, excavation, laying of foundation, site restoration and landscaping; and

        (B) procurement of construction materials, equipment or workers, as necessarily required for any works described in paragraphs (a) to (e);

      2.4.2 construction consultancy contract:

      means a contract to carry out consultancy services in relation to construction work and includes:-

      • planning and feasibility study;
      • architectural work;
      • engineering;
      • surveying;
      • exterior and interior decoration;
      • landscaping; and
      • project management services.

3. THE PURPOSE OF CIPA

The followings are among the purpose of the Act[4] :-

  • to facilitate regular and timely payment;
  • to provide a mechanism for speedy dispute resolution through adjudication;
  • to provide remedies for the recovery of payment in the construction industry;
    (i.e. by providing default payment terms in the absence of provisions to that effect and prohibits conditional payment terms that inhibit cash flow)
  • to provide for connected and incidental matters.

4. HOW DOES CIPA WORK?

The Claimant may commence the adjudication proceedings by serving a written notice of adjudication to the Respondent. The written notice must specify the nature, description of the dispute and the remedy sought together with supporting document on the Respondent. (Section 8)

Next, an Adjudicator will be appointed and a copy of the adjudication notice must be given to the Adjudicator. (Section 9 (2))

The Claimant later will serves the adjudication claim on the Respondent within 10 working days from the receipt of the acceptance of appointment by the Adjudicator. (Section 9(1))

In reply, the Respondent will serves a written adjudication response within 10 working days from the receipt of the adjudication claim. (Section 10 (1))

The Claimant may serve the reply within 5 working days from the receipt of the adjudication response. (Section 11(1))

The Adjudicator will hear both parties presentation.

Only then, the decision will be delivered by the Adjudicator. The decision must be made in writing. (Section 12 (4))

  • It is essential to note that, the decision of adjudication will be binding on the parties except if[5] :-
    • (a) it is set aside by the High Court on any of the grounds referred to in Section 15;

      (b) the subject matter of the decision is settled by a written agreement between the parties; or

      (c) the dispute is finally decided by arbitration or the court.

5. WHO PAYS FOR THE ADJUDICATION?

    5.1 The cost of the adjudicator's fees and expenses will be shared equally by both parties. Under Section 19(4) , the fees will be deposited with the Director of the KLRCA in advance as security.

    5.2 The loser of the proceedings needs to bear the related cost. Under Section 18(1) , the adjudicator can make an order as to 'costs to follow the event' which basically means that the loser must pay for the legal and other related costs to the winner in the adjudication proceedings.

    5.3 In addition, the former also needs to pay for the amounts as decided by the adjudicator in regard to the payment dispute.

6. SALIENT SECTIONS

    6.1 Among the salient sections in the CIPA Act are as follows:-

      (a) Application[6]

        The CIPA will be applicable to every written construction contract which related to construction work carried out either wholly or partly within the territory of Malaysia.

      (b) Non-application[7]

        The CIPA will not be applicable to a construction contract entered into by a natural person for any construction work which involves less than 4 storeys high or even intended for his own occupation (i.e. residential construction contract).

      (c) Prohibition of Conditional Payment[8]

        Construction contract will be void if there is any payment made in relation to the conditional payment provision. It is a conditional payment provision when the obligation of one party to make payment is conditional either:-

          (i) upon that party having received payment from a third party; or

          (ii) upon the availability of funds or drawdown of financing facilities of that party.

      (d) Default provisions in the absence of terms of payment[9]

        The party who has agreed to carry out construction work or consultancy services under a construction contract has the right to progress payment at a value calculated by reference to:-

          (i) the contract price for the construction work/ consultancy services;

          (ii) any other rate specified in the construction contract;

          (iii) any variation agreed to by the parties to the construction contract by which the contract price or any other rate specified in the construction contract is to be adjusted; and

          (iv) the estimated reasonable cost of rectifying any defect or correcting any non- conformance or the diminution in the value of the construction work/consultancy services performed, whichever is more reasonable.

      (e) Adjudication Authority[10]

        The Kuala Lumpur Regional Centre for Arbitration (KLRCA) will be the adjudication authority that responsible on the following matters:-

          (i) setting of competency standard and criteria of an adjudicator;

          (ii) determination of the standard terms of appointment of an adjudicator and fees for the services of an adjudicator;

          (iii) administrative support for the conduct of adjudication under the Act; and

          (iv) any functions as may be required for the efficient conduct of adjudication under the Act.

7. HOW CIPA IMPACTS THE PLAYERS (I.E. CONSTRUCTION COMPANIES)?

    7.1 The CIPA Act will apply to all parties who involved in construction works, construction consultancy services and construction supplies in both government and private sector projects.

    7.2 The primary users of the CIPA would include client organizations like the government and developers, contractors, sub-contractors, suppliers and construction professionals which covers inter alia, the building industry, the oil and gas industry, the petrochemical industry, telecommunication, utilities, infrastructure and others.

    7.3 However, it needs to be noted that CIPA does not apply to an individual owner, i.e. resident who builds a house not more than four-storeys high which wholly intended for his own occupation.

    7.4 In conclusion, the sustainability of future projects carried out by the players, i.e. construction companies both government and private sectors will be secured with the enforcement of this new Act in Malaysia.


[1] "One step at a time", an article written by Sr Noushad Ali Naseem Ameer Ali, President of the Institution of Surveyors Malaysia & Chair - Construction Industry Working Group on Payment (WG 10).
[2] Section 32 of the Construction Industry Payment and Adjudication Act 2012
[3] Section 3 of the Construction Industry Payment and Adjudication Act 2012
[4] Preamble of the Construction Industry Payment and Adjudication Act 2012
[5] Section 13 (a) - (c) of the Construction Industry Payment and Adjudication Act 2012
[6] Section 2 of the Construction Industry Payment and Adjudication Act 2012
[7] Section 3 of the Construction Industry Payment and Adjudication Act 2012
[8] Section 35 of the Construction Industry Payment and Adjudication Act 2012
[9] Section 36 of the Construction Industry Payment and Adjudication Act 2012
[10] Section 32 of the Construction Industry Payment and Adjudication Act 2012

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