The Construction Industry Payment and Adjudication Bill 2011 (CIPA): What is the fuss?

There is much interest generated in the construction industry of late what with the proposed Construction Industry Payment and Adjudication Bill 2011 (CIPA). Many professional bodies have jumped on the bandwagon in offering courses and seminars to key construction industry officials to try to explain the Bill of Parliament and how the Bill when passed in Parliament will affect them. It has been hinted that the Bill will be passed this March 2012. This would mean that companies in the construction industry should arm itself and be ready for the new regime of statutory adjudication. This is the era of adjudication in the construction industry.

Why CIPA? The construction industry themselves have been pushing the government to enact this piece of legislation since 2003 to address the cash flow problems plagued by the industry. The primary objective of the proposed Act is to address critical cash flow issues in the construction industry. It aims to remove the practice of conditional payments (‘pay when paid’ and ‘pay if paid’) and reduce payment default by establishing a cheaper, speedier system of dispute resolution in the form of adjudication. According to the provisions of CIPA every construction contract made in writing that relates to construction work carried out in Malaysia would be affected by the regime of adjudication. This would essentially mean that if you have entered into a construction contract and there is a problem with regards to payment, an adjudication process can be commenced either by you or against you. A construction contract can be a construction work contract and or a construction consultancy contract.

To this extent, the parties will be subjected to compulsory adjudication or statutory adjudication. This would mean that both parties will be dragged into the adjudication process which is dictated by the provisions of CIPA. The provisions of CIPA does not however affect natural persons entering into a construction contract in respect of a building wholly intended for his own occupation and is four storeys and below.

Be that as it may, would adjudication stop your right to arbitration or to go to court to litigate matters? The answer is No. The purpose of adjudication is to hurry along cash flow and facilitate payment in the construction industry. Parties are free to opt for arbitration or court litigation to deal with the legal matters concerning the same. CIPA simply provides a statutory right for the parties to demand payment for work done and to create a simple process to ensure that a decision and payment is made. This of course is in the form of adjudication as a process.  In fact, the parties can commence adjudication and concurrently arbitrate or litigate the matter as well. Of course, common sense would dictate that the adjudication process will be terminated if the dispute is decided by arbitration or the court before the adjudication decision can be made. If however, the adjudication decision comes first then it is a binding decision and payment must be made. 

In summary, the statutory adjudication has the following characteristics - 

1.     It is a mandatory and statutory process that does not require the agreement of the parties’ to commence the process.

2.     It offers a much faster process compared to arbitration and court litigation because the time frame is as prescribed by the proposed CIPA itself. It is the only form of dispute resolution that has a statutory time period in which the dispute must be resolved in forty five (45) working days.

3.     It provides a binding decision on a payment dispute.

4.  The parties can choose their own adjudicator or request for Kuala Lumpur Regional Centre of Arbitration [KLRCA] to choose an adjudicator on their behalf.

There are many procedures to be complied with by the parties and the time frame is dictated by the provisions of CIPA. The entire adjudication process including the time required to decide the case would take approximately one hundred (100) working days.  So how do you go about starting the adjudication process? The adjudication process can be summarised by the following steps -

1.     Payment Claim - The unpaid party serves a Payment Claim on the non-paying party. The non-paying party would then serve the Payment Response on the unpaid party in reply to the claim within 10 working days. (Either party has a right to refer the dispute to adjudication)

2.     Initiation of Adjudication - The adjudication proceeding is thereby initiated by the serving of a Notice of Adjudication served by the claimant on the respondent.

3.     Nomination of Adjudicator - An adjudicator is thereby nominated by the agreement of both parties in the dispute within 10 working days from the service of the notice or to request for the adjudicator to be nominated by the Director of the KLRCA. The KLRCA has 5 working days to nominate the same.

4.     Adjudication Claim - Once the adjudicator is nominated and has accepted the terms and conditions and relevant fees, the claimant is to serve the Adjudication Claim on the respondent within 10 working days upon receipt of the acceptance by the adjudicator whereupon the respondent is to then serve the Adjudication Response on the claimant within 10 working days; the claimant may then serve a further Adjudication Reply within 5 working days.

5.     Commencement of Adjudication - The adjudication would then begin. KLRCA shall be informed of the commencement. The adjudicator shall direct that reasonable proportion of the adjudicator’s fees in equal shares be deposited in advance to the Director of KLRCA as security. Parties can represent themselves or choose to be represented namely by a lawyer.

6.     Decision - The Adjudicator has to reach a decision not later than 45 working days from the service of the Adjudication Response or Adjudication Reply, whichever is later. An adjudication decision which is not made within the specified period is void. The adjudicator may also direct full payment of the fees and expenses to be deposited with the Director of KLRCA prior to the release of the adjudication decision to the parties. A copy of the decision shall be provided not only to the parties but a copy must be served on the Director of KLRCA as well.

Hence it is important to nominate the correct adjudicator and if in doubt, reliance should be placed on the KLRCA to appoint one on your behalf. The KLRCA has been appointed the adjudication authority in Malaysia by virtue of Part V of CIPA, thus setting the standard terms of appointment, fees for adjudicators and setting the competency standards and criteria for adjudicators.

It is not clear whether CIPA would effectively address the cash flow problems in the construction industry but Malaysia is one of five countries who have opted to adopt this form of legislation. The other countries are the United Kingdom, some States and Territories in Australia, New Zealand and Singapore. We can only wait and see.