TO BOND OR NOT TO BOND Ð WILL STATUTORY BONDS CURE THE ILLS OF NON PAYMENT IN THE CONSTRUCTION INDUSTRY?
by
Lim Chong Fong
BSc(Bldg) Hons (NUS), MRICS, MISM, MCIOB, MCIArb,
LLB Hons (Lond), CLP, Barrister at Law
Introduction
1. It is nowadays the prime concern of contractors and consultants whether they will be getting paid after work has been done or services rendered.
2. The unpaid contractor or consultant is an unsecured creditor and the resolution of disputed payment through the present legal avenues take considerable time. Very often the unpaid contractor or consultant ends up with only a paper judgment which is not commercially enforceable because the debtor is already defunct.
3. In this regard, the Construction Industry Development Board Malaysia is now Òspear headingÓ the enactment of the proposed ÒConstruction Industry Payment Adjudication ActÓ (Òthe proposed ActÓ) to address the aforementioned concern.
4. One of the main features of the proposed Act is the proposal requiring persons who let out construction contracts to furnish a payment bond as security for payment. The bond ensures that the unpaid contractor or consultant is paid at the end of the successful legal fight.
5. The proposed provision of the payment bond is unique because no other country who has enacted security for payment and adjudication legislation has done so.
6. As aforemention, the prime benefit is that it is security for payment for work or consultancy services already done or rendered. The other remedies of suspension and going slow as provided in the proposed Act protect only future exposure but does not secure past work done or services rendered.
7. Nevertheless, in order to avoid abuse as well as to streamline with the other remedies, it is proposed that the demand against the payment bond can only be made after a positive result is obtained in adjudication. It is also proposed that the payment bond must be obtained from a recognized banking institution under BAFIA thus assuring enforcement thereof.
8. The benefit is thus obvious as it is a Òrock solidÓ guarantee of payment payable on demand just like a performance bond.
9. The principal problem with the payment bond is that there is very likely to be an increase in construction cost for the construction and property industry as a whole. This is because the proposal envisages for the provision of the payment bond at every level unless exempted by the proposed Act. The exemption applies to the Government or such other parties as approved by the Minister as well as to construction contracts below say RM50,000.00 in value. The increased cost will be due to the premium payable as well as the collateral to be provided to the financial institution to procure the bond. It is also largely feared that many contractors may not afford to pay the premium and/or to put up the necessary collateral.
10. There is also debate as to the value of the payment bond. Should it be 5% or 10% of the contract price or even more? In this regard, there has to be a balance between adequate security versus the financial burden for the procurer.
11. That notwithstanding, another problem is the operational duration of the payment bond. Should it be till the end of the defects liability period or much longer until the end of any dispute resolution process at least? This is a thorny question. The difficulty is to prescribe a definite and acceptable time frame at the time of furnishing the payment bond.
12. There would also be the expected intensification in contract administration burden to monitor the procurement and call on the payment bond. This might be onerous on lay employers for e.g. those who let out home renovation contracts.
Conclusion
13. It is perceived that the statutory payment bonds should cure the ills of non payment in the construction industry though there is a price to it.
14. Nevertheless, it is still thought better to have it than not and thus ideas especially those which will overcome the associated problems are welcome and in this regard, please e-mail to lim.chongfong@azmandavidson.com.my.