Case Summary: Lion Pacific Sdn Bhd v Pestech Technology Sdn Bhd and another appeal [2022] MLJU 2109

A fairly recent Court of Appeal’s decision overturning the High Court’s decision in allowing the enforcement application of the adjudication decision on the grounds of breach of 2nd rule of natural justice by the adjudicator.

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Brief Background Facts
The Government accepted a tender submitted by Konsortium Skypark Link Sdn Bhd – Lion Pacific Sdn Bhd [“Consortium”] for a construction project via a Letter of Acceptance dated 22.1.2013. Subsequently, by way of a Letter of Award dated 7.10.2013, the Consortium appointed the Lion Pacific Sdn Bhd (“Lion Pacific”) as a sub-contractor for the system works package parcel of the project. Pestech Technology Sdn Bhd (“Pestech”) was appointed as the sub-contractor by Lion Pacific by way of a sub-contract dated 24.11.2014.

Payment disputes arose between Lion Pacific and Pestech in connection with the Project and this led to Pestech initiating an adjudication proceeding pursuant to the Construction Industry Payment and Adjudication Act 2012 (“CIPAA 2012”), claiming for, amongst other, a sum of RM24,902,980.45 for the value of work done. Lion Pacific disputed Pestech’s claim on the ground that payment for the works shall only become due from Lion Pacific to Pestech upon the certification of Secretary General of Ministry of Transport (“MOT”) by reason of Clause 3.1 and 4.1 of the sub-contract. The Adjudicator decided in favour of Pestech.

The High Court’s finding on the main issues are briefly as follows:

1. 1. Whether the Adjudicator had jurisdiction under CIPAA to adjudicate Pestech’s claim:

Lion Pacific contended that the adjudicator had exceeded his jurisdiction under section 15(d) of CIPAA 2012 read together with section 27(1) CIPAA by deciding that Clause 4.1 of the sub-contract was subject to section 35(1) CIPAA 2012 because clause 4.1 required payment to be conditional upon MOT’s certification.

The Learned High Court Judge had discussed in detail with regard to the interpretation of section 35 of CIPAA 2012 and held that (1) the sub-contract is a commercial contract which should be construed in a commercially sensible manner; (2) on a commercially sensible construction of Clause 4.1, it is clear that clause 4.1 is a ‘Pay-if-Certified’ provision; and (3) there is nothing in section 35(1) of CIPAA that limits its effect to the two circumstances specified in section 35(2)(a) and (b) CIPAA. Parliament has employed a wide term ‘any’ in section 35(1) CIPAA. Therefore, Clause 4.1 is invalidated by section 35(1) of CIPAA.

Furthermore, even if it is assumed that the adjudicator has erred in his interpretation of clause 4.1 of the sub-contract, the adjudicator’s error in itself cannot be a ground for the court to set aside the adjudication decision pursuant to section 15 of CIPAA.

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1. 2. Whether the adjudicator had breached the 2nd rule of natural justice under section 15(b) and 24(c) of CIPAA:

The Leaned High Court Judge was not persuaded that the adjudicator had breached the 2nd rule because (1) it is clear from the adjudication decision that the adjudicator had considered all the defences raised by Lion Pacific at the adjudication and it is evident that the adjudicator had in fact accepted some of the defences raised by Lion Pacific and (2) before delivering the adjudication decision, the adjudicator had not deprived Lion Pacific’s rights to adduce evidence and to submit on all the questions which arose in the adjudication.

Lion Pacific contended that there were “manifest errors” or omission in the adjudication decision but this was not agreed by the Learned High Court Judge.

In any event, the Learned High Court Judge was of the view that he cannot set aside the adjudication decision premised on the alleged error and omission. In any event, such an error and omission can be remedied in the arbitration.

Dissatisfied with the High Court’s decision, Lion Pacific filed an appeal to the Court of Appeal based on the following grounds:

1. 1.CIPAA does not apply to the sub-contract as the main contract which forms part of the sub-contract, was entered into prior to the coming into force of CIPAA. As such, the adjudicator has no jurisdiction over the adjudication proceedings between the parties.
   2. The learned adjudicator had acted in excess of his jurisdiction by incorporating a new contractual term into the sub-contract.
   3. There are clear and/or manifest errors in the adjudication decision that warrants a stay of the adjudication decision.

Consistent with the High Court’s decision, the Court of Appeal agreed that the Learned Adjudicator has jurisdiction to adjudicate Pestech’s claim.

However, the Court of Appeal overruled the High Court’s decision in allowing Pestech’s application to enforce the adjudication decision, based on the following reasons:

1. 1 From a plain and literal reading of the wording of section 35(1) of CIPAA, a ‘Pay-If-Certified’ provision as per Clause 4.1 of the sub-contract cannot be construed as a conditional payment clause as the mutual agreement of the parties was that Lion Pacific’s obligation to make payment would only arise upon certification of the works done by the Project Director of the MOT failing which the works cannot be considered as having been carried out.
2. Notwithstanding the object of CIPAA being to facilitate prompt payment, the contractual obligations of the parties as expressly agreed upon cannot in principle be disregarded. Therefore, the Learned High Court Judge had erred in holding that Clause 4.1 of the sub-contract is invalidated by Section 35 of CIPAA as it went beyond the express intention of the contracting parties (para 36 of the judgment).
3. 2. There was a serious breach of rules of natural justice by the adjudicator centred on his failure to give recognition and importance to the terms of the sub-contract wherein the mandatory MOT’s certificate was a significant feature that had been agreed to for entitlement of payment to the contractor. Should the adjudicator give proper consideration to the certification (or lack of) by the Project Director of MOT, he would have held that no sums are payable to Pestech (paragraph 42 of the judgment).
4. 3. In contrast with the findings of the Learned High Court Judge, the Court of Appeal held that the adjudicator in the process of arriving at his adjudication decision had demonstrably failed to carefully consider and appreciate the main substantive defences of Lion Pacific. (paragraph 44 of the judgment).

The Court of Appeal allowed Lion Pacific’s appeal and the adjudication decision was set aside.

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Conclusion
This case is significant as to the interpretation of section 35(1) of CIPAA 2012 and, in a way, helps to clear some of the confusion caused by different interpretation in the High Court cases of UDA Holdings Bhd v Bisraya Construction Sdn Bhd & Anor and another case [2015] 11 MLJ 499 and Ireka Engineering & Construction Sdn Bhd v TRI Pacific Engineering Sdn Bhd [2020] MLJU 548.

However, based on the reasons set by the Court of Appeal in this case, it would seem that the courts would take a more restrictive approach in interpreting Section 35(1) CIPAA 2012. The effect of a more restrictive approach by the courts on the construction industry and the way parties would now draft their payment terms in construction contracts would remain to be seen.

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This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.

About the Author

Felicia Lai Wai Kim
Senior Associate, Adjudication, Construction & Engineering Disputes
Harold & Lam Partnership
felicia@hlplawyers.com