Adjudication in Malaysia

July, 2012

After much debate the Construction Industry Payment and Adjudication Act 2012 of Malaysia received Royal Assent on 18 June 2012. [Rules of Malaysia, Act 746, Construction Industry Payment And Adjudication Act 2012. English Translation.] It came into force on the 22 June 2012, and so Malaysia now has a statutory payment and adjudication regime for construction contracts.

The Act applies to all construction contracts made in writing after 22 June 2012 including those entered into by the Government of Malaysia. It applies to all construction work including consultancy agreements, but excludes buildings of less than four storeys that are intended for occupation by a “natural person”. The Act takes some of the most successful features of the adjudication and security of payment legislation that has been enacted around the world. It provides a pre-adjudication procedure and then a short form adjudication process, which takes slightly longer than other statutory adjudication processes.

The Act requires the parties initially to follow the payment mechanics of the construction contract. If a party remains unpaid then the pre-adjudication procedure can be used. This requires a payment claim based upon the unpaid claim under the construction contract. The responding party could then admit or dispute the claim in whole or in part within 10 days of the payment claim. A dispute which crystallises from the exchange can then be referred to adjudication.

Adjudication is initiated by a written notice setting out the nature of the dispute and remedy required. An application for the appointment of an adjudicator is made to a single nominating body, which is the Kuala Lumpur Regional Centre for Arbitration “KLRCA”. The adjudication claim must be served within 10 working days of receipt of acceptance of the appointment by the adjudicator. The responding party then has 10 days to serve a written response, and the claimant may within 5 working days from receipt of any response serve a reply. Supporting documents are attached to each of the submissions.

The adjudicator then has 45 working days from either the response or the reply, whichever is the latter, to issue a written decision. If a response is not issued then the adjudicator has 45 working days from the date on which the response should have been served. The parties can agree to further extend time. The decision must be in writing and should also contain reasons. If the decision is not made within the specified time then the decision is void.

The powers of the adjudicator are set out at section 25 of the Act. The adjudicator can establish the procedures for the adjudication as well as order disclosure and production of documents and set deadlines. He can explicitly draw upon his knowledge and expertise as well as appoint independent experts (but only with the consent of the parties). He can also require that evidence be given on oath. The power to review and revise certificates and other documents is expressly set out. In addition, an adjudicator can award finance costs and interest.

The parties can agree the terms of the adjudicator and his fees. However, if they fail to agree then the current standard terms of appointment and fees of the KLRCA apply. Parties are jointly and severally liable for these, in much the same way as other legislation around the world. However, security for those fees can be requested in the form of a deposit placed with KLRCA. An adjudicator has a specific lien in the Act and so may not be required to release his decision until full payment has been made.

The Act states that an adjudicator’s decision is confidential. It is unusual for legislation of this type to include a specific confidentiality provision. This does however address a fundamental issue that is often overlooked. The usual immunity of an adjudicator, also in this case KLRCA is included, stating that no action or suit can be brought against them for any act or omission carried out in good faith.

The decision is binding unless it is set aside by the High Court, finally decided in arbitration or is subject to a settlement between the parties. The Act also specifically provides for the enforcement of an adjudication decision. A party can enforce an adjudication decision by applying to the High Court.

Finally, the limited payment provisions of the Act require that interim payments are made in respect of construction contracts. In the absence of any specific payment clauses then payments are made monthly. Conditional payment is prohibited, so effectively making any pay-when-paid provisions ineffective.

You can download the legislation here.

The kind assistance of Muhammad Ehsan Che Munaaim is acknowledged for his comments on this paper, as well as the provision of an English version of the Malaysian Construction Industry Payment and Adjudication Act 2012.