Resolution of Construction Industry Disputes : Arbitration, Statutory Adjudication or Litigation in the Construction Court?

Introduction

Malaysian construction disputes are traditionally resolved in arbitration[1], otherwise in the normal courts of law[2]. These construction disputes are often technically complex involving mixed issues of fact and law. Both modes of dispute resolution have in recent years been increasingly perceived as inadequate and unsatisfactory by the users especially in respect of cost and time taken to dispose the dispute.

It is observed from the United Kingdom experience that construction justice is best served by the trinity of construction arbitration, statutory adjudication and the specialist construction court[3]. Thus by the initiative of the Construction Industry Development Board (CIDB) to transform the Malaysian construction industry dispute resolution landscape in line with the vision of the Construction Industry Master Plan , the Construction Industry Payment and Adjudication Act 2012[4] (CIPAA) is finally enacted in June 2012 after several years of debate. The specialist construction court is also established by the Malaysian Judiciary on 1st April 2013 in the High Courts in Kuala Lumpur and Shah Alam at the joint request of the CIDB and the Bar Council Malaysia. In the meanwhile, the Kuala Lumpur Regional Centre for Arbitration (KLRCA) has in the last couple of years also undergone rapid transformation and is actively promoting arbitration as the preferred ADR way. The Arbitration Act[5]  has been revised by the Government to strengthen arbitration.

The transformed landscape and availability of these alternative modes of construction dispute resolution pose a challenge for both counsel and client to determine and select the mode that is best suited for the dispute. This paper seeks to discuss the pros and cons as well as the limitation of each of these alternative modes of construction dispute resolution to facilitate the selection.

Construction Arbitration

Arbitration is only available as a mode to resolve the dispute if there is an arbitration agreement[6] between the parties. The agreement must be in writing[7]. The existence of the arbitration agreement is seldom a problem in construction contracts at the higher level of construction contracting pyramid where standard forms of contract are used. Problems are often seen in sub contracts especially bespoke ones at the lower level of the pyramid. The arbitration is confined to the parties to the arbitration agreement and there cannot be the inclusion of other third parties except by consent even though the disputes may be related ones.

The arbitrability of the subject matter in dispute is dependent on the width of the arbitration agreement. Most contractual issues are encompassed by the agreement but related issues in tort such as negligence may not necessarily be so included. Hence in such situations, the dispute cannot be satisfactorily resolved together in the arbitration.

As often prescribed in the arbitration agreement in the construction contract, there are limitations in the commencement of arbitration. The commencement is usually postponed till completion of the works or termination of the contract[8]. Besides, the referral and obtaining the decision of the contract administrator[9] or adjudicator[10] is made the condition precedent to the commencement of the arbitration proceedings. There are also other forms of contract for large projects that require reference to mediation as the condition precedent to the initiation of arbitration. The limitation to the commencement or initiation of arbitration proceedings is an important consideration particularly when speed of obtaining the arbitration award is an essential consideration.

The arbitration award is recognized and enforceable as a judgment of the High Court[11]. Very importantly, the award is often enforceable abroad by virtue of the New York convention. This is the distinct superiority of arbitration over the other modes of dispute resolution. The enforceability of the dispute resolution outcome has to be considered when one of the disputing parties is a foreign entity since there are many international contractors and developers operating in Malaysia and their assets are housed in their home country.

Subject to the provisions of the Arbitration Act and agreement of the parties, the arbitration award is final and binding[12]. Finality generally connotes absence from interference by the High Court. Nevertheless, it must be appreciated notwithstanding that the award is final, there is still a limited challenge to the award available in the High Court on grounds of invalidity of the arbitration agreement, excess of jurisdiction, procurement of award induced through fraud or corruption, denial of natural justice in the course of the arbitration proceedings, etc[13].  The Arbitration Act further gives the option[14] to the parties via the arbitration agreement whether to seek the High Court’s intervention by way of determination of preliminary points of law and post award reference on questions of law. If the arbitration is domestic[15], the parties are at liberty to opt out whereas in a non domestic or international arbitration[16], the parties are at liberty to opt in.  By opting for court intervention, the parties are deemed to prefer a legally correct result instead of finality of the award. Otherwise, there is no recourse if the arbitrator has misdirected himself in law or that the award is bad in legal reasoning. The choice of a legally correct result over finality naturally affects the speed and early conclusion of the resolution of the dispute. It nevertheless remains an important consideration as many construction arbitrators especially the technically qualified ones appointed by the professional institutions or boards may not be suitable to decide issues involving pure law or mixed fact and law.

Arbitration affords the parties right to choose their arbitrator. The arbitrator can be a construction professional or a lawyer. The number can be one or three. If the parties fail to agree to their respective choice of arbitrator, then the arbitrator will be appointed by the body named in the arbitration agreement otherwise by the KLRCA. The choice of the arbitrator or even pursuing arbitration itself is very much dependent on the nature of the dispute. The dispute that purely or predominantly involves technical issues of fact such as design, defects or valuation of the work is suitable for arbitration. However this may not be necessarily so where the dispute involves mixed issues of fact and law such as delay and extension of time or termination of the contract or that involves pure issues of law such as the interpretation of the contract.

Generally arbitration proceedings in a moderately complex construction dispute nowadays take between two to four years. The length of time depends on various factors principally the nature of the dispute and availability of counsel and witnesses. It is an adversarial process. Conceptually, it should not be fast because it is a final and binding process and the parties are to be given a fair and reasonable opportunity to present their case[17].  The arbitrator is paid by the parties at pre agreed charges and they should therefore be given their desired latitude to ventilate their grievances. This may entail extensive discovery of documents and detail lengthy and prolong cross examination of witnesses particularly on issues such as undue influence or interference of the contract administrator by one of the parties. The conduct of the arbitration proceedings is flexible and the parties are at liberty to adopt the rules[18] as they so desire otherwise the arbitrator is the master of the procedure. The Evidence Act 1950 does not apply to arbitration proceedings[19]. Arbitration should consequently be preferred if the parties wish to have the room to present their respective case to the fullest.

As to costs, arbitration can be an expensive. The costs include the fees of the arbitrator and the administrative expenses such as for the hearing venue and stenographic services. The arbitrator fees are either ad valorem scale fees pegged to the amount in dispute or on each hour of the arbitrator’s time ranging between RM300 to RM1200 of time spent. Besides, the respective parties will also have to incur their costs of representation though it is not compulsory that they be represented by an Advocate & Solicitor[20]. The prevailing practise is that both parties are invariably represented by Advocates & Solicitors. Costs is probably one of the critical factors of consideration as the party especially the unpaid claimant is likely to be cash strapped at the point of commencement of dispute resolution. In arbitration proceedings, the parties will have to finance the fees of the arbitrator and administrative expenses equally till the publication of the award in addition to their own representation costs.

The arbitration proceedings are private and confidential[21]. In other words and subject only to the exceptions accorded by law, the dispute and information generated in the proceedings will not be disclosable to the public though this will not often be a major consideration in a construction dispute unlike in intellectual property disputes.

Statutory Adjudication

The right to statutory adjudication of the construction dispute is governed by the CIPAA and is hence subject to the constraints laid down therein[22].

Statutory adjudication is confined to payment disputes which are disputes over payment for work done or services rendered under the express terms of the construction contract. The CIPAA applies to all construction contracts relating to construction work but they must be examined from 4 interrelated perspectives[23]. In gist, it applies to all written construction, supplies and consultancy contracts for works wholly or partly situated in Malaysia other than contracts for a residential building below 4 storeys wholly intended for occupation by a natural person and those contracts exempted by the Works Minister.

The adjudication process is swift and the decision is binding but not final. In other words, the dispute can be re-determined afresh by arbitration or litigation in court. The non finality of the adjudication decision is premised on the conceptual presupposition that it is unjust to have a conclusive decision when it has been rapidly determined. That notwithstanding, the decision is binding and enforceable as a judgment of the High Court[24]. There is only a limited avenue of challenge against the adjudication decision if it has been improperly procured[25]. The attractiveness of statutory adjudication is the availability of remedies[26] as prescribed in the CIPAA, to wit, to enable the debts to be collected as well as avoidance of further financial exposure by continuing performance of the contract. In the former, the adjudication decision can be converted into a court judgment for enforcement within Malaysia or direct payment can be sought from the principal of the non paying party whereas in the latter, the work can be suspended or slowed down pending payment. These remedies can be exercised concurrently. Furthermore the adjudication decision will facilitate the safe exercise of other contractual or common law remedies such as termination of the contract for payment default.  Unlike arbitration awards, it is however difficult to enforce the converted court judgment abroad unless there is a reciprocal recognition and enforcement treaty between Malaysia and the other country such as England and Singapore. It is thus essential to note that statutory adjudication may not be suitable if there is the primary intention to enforce the decision against the foreign assets of the international contractor or developer.

By comparison with arbitration or even litigation where summary judgment is pursuable, the conduct of statutory adjudication under the CIPAA is the quickest. The maximum time frame from commencement to conclusion is 95 working days unless extended with the consent of the parties. Accordingly, statutory adjudication will be the preferred mode of payment dispute resolution particularly where time is of the essence to get the defaulting party to pay to sustain the cash flow to continue and complete the project. In addition, the statutory adjudication can unconditionally be commenced at any time whether during or after project completion. The conduct of the adjudication is the purview of the adjudicator and it is likely to be extensively based on documents only with written submissions since the time availability is short and limited. It will be unlikely that witnesses are called to give oral evidence. The prior preparation of the parties especially the claimant to identify, review, collate and produce the relevant project documentary evidence is crucial. Thus it is essential that the parties must be ready and able to “get up” very swiftly to be able to respond to the expectation and demands of statutory adjudication. It is also likely that the adjudicator will use his own expertise and inquisitorially determine the dispute which is permissible under the CIPAA[27].

The choice of the adjudicator can be agreed to by the parties but the adjudication has to be conducted by a single adjudicator only. If the parties are unable to agree on the adjudicator, the default appointing body is the KLRCA which is the Adjudication Authority under the CIPAA[28]. Since statutory adjudication is confined to payment disputes, the choice of the parties will likely be a registered quantity surveyor[29] who will be most familiar with payment issues.

Since the time frame of the adjudication is short, the fee of the adjudicator should be modest comparatively. The fee can be negotiated between the parties and adjudicator otherwise it will be ad valorem as prescribed by the KLRCA scale based on the amount in dispute. Representation in the statutory adjudication proceeding is at the parties’ option[30]. Therefore they may self represent or engage the services of an Advocate & Solicitor or even a construction claims consultant to represent them. It is likely that construction claims consultants will charge the client on a “success basis” contingency fee arrangement making it attractive for the parties especially the unpaid claimant to pursue statutory adjudication if costs is a major consideration.

Just as in arbitration, the statutory adjudication proceedings and documents produced therein are confidential[31].

Litigation in the Construction Court

The Construction Court is a branch of the High Court of Malaya and has unlimited monetary jurisdiction as well jurisdiction to grant equitable reliefs such as specific performance, injunctions, etc[32]. The jurisdiction of the Construction Court that has been established as from 1st April 2013 is as follows[33]:

a)     Building, engineering or other construction disputes including;

(i)              claims arising from the Construction industry Payment and Adjudication Act (Act746) excluding judicial review;

(ii)             claims relating to performance bonds, guarantees and insurance;

(iii)            claims in connection with quality of goods sold or leased, and work executed or materials supplied or services rendered;

(iv)            claims in connection the environment (for example, environment pollution cases);

b)     Claims by or against engineers, architects, surveyors, accountants, consultants and other specialist consultants in connection with services rendered;

c)      Claims by or against local authorities in connection with their statutory duties in relation to land development and building construction;

d)     Arbitration related proceedings including challenges against arbitration awards; and

e)     Appeals from the subordinates courts.

The jurisdiction of the Construction Court is wide and though the local jurisdiction as prescribed is confined to the Federal Territory of Kuala Lumpur and Selangor, it is possible[34] by consent of the parties to transfer construction disputes from the courts in the other States of West Malaysia to the Construction Court.

It is the constitutional right of the parties to refer any dispute to court. Unless a stay is applied for and obtained[35], the parties can still have their dispute resolved in court notwithstanding that there is an arbitration agreement[36].  Unlike arbitration, the Construction Court is able to determine multi party disputes in the same forum and this is important in relation to defective work dispute where there is often the claim against both the contractor and the designer.

The judgment of the Construction Court is final and binding subject to the usual appeal to the Court of Appeal and Federal Court with leave. Judgment of the High Court is subject to review[37] on appeal and is in that sense of lesser finality than an arbitration award where the parties have opted out of court intervention. Furthermore as discussed on enforcement of adjudication decision, there is the similar limitation on the enforcement of the judgment of the Construction Court abroad. The proceedings in the Construction Court are adversarial and governed by the Rules of Court 2012 and the Evidence Act 1950 as modified by Practice Directions that will likely in due course be issued by the Construction Court.

As seen from the workings of the High Court in recent years, the average time frame to commence and conclude a case after trial is 1 year.  Thus it foreseeable that the construction dispute resolution in the Construction Court will be an expedited one compared with arbitration. This expedited procedure will likely involve adopting novel techniques utilized in the UK Technology and Construction Court (TCC) such as the imposition of limited time “chess clock” hearings and increasing use of expert witnesses to assist and facilitate the court on factual portions of the dispute particularly on issues of causation and quantum of the claims. Besides, the Construction Court is also implementing electronic filing, retrieval, presentation and management of documentary evidence.

The filing fee of the case in the Construction Court is nominal at a lump sum of RM 400 presently. In view of the nominal fee that is subsidized by public funding, it is thus fair to expect that the disputant parties will not be afforded the opportunity to present their case to the fullest but subject to supervision by the judge on time management.  The parties must however be represented by an Advocate & Solicitor and that will incur costs of representation.

The proceedings in the Construction Court are public and there is no privacy and confidentiality protection. In other words, the public has access and is able to view the entire proceeding in the open courtroom. All judgments of the Construction Court will be published in a dedicated law report.

Recommendation and Conclusion

It can be surmised that there is no one mode of dispute resolution that fits all circumstances. As always in most human endeavours, it is situational and the best fit has to be chosen. The sensible first step is perhaps to begin by exclusion, to wit, dispensing the mode that is inapplicable due to its inherent jurisdictional limitation. Hence arbitration is unavailable if there is no arbitration agreement. Likewise statutory adjudication is unavailable if the dispute is not a payment dispute. The next step is to then balance the competing primary considerations of suitability, finality, enforceability and speed followed by secondary considerations of costs, representation and perhaps confidentiality amongst the three alternative modes of dispute resolution. Generally if speed, as is often the case is the paramount factor, statutory adjudication is probably the most appropriate mode. It should be noted that it is possible to commence statutory adjudication concurrently[38] with arbitration or litigation in the Construction Court on the same dispute. However this is unlikely to happen in reality as there is little practicable benefit. It is more probable that the dissatisfied party in the adjudication will thereafter proceed to arbitration perhaps using the KLRCA Fast Track Rules or litigation in the Construction Court to finally re-determine the dispute. At that point the party may also apply to the Construction Court to stay[39] the effect of the adjudication decision. If statutory adjudication is however not utilized, the pivotal consideration between arbitration and litigation in the Construction Court in a domestic construction dispute will centre on the nature of the dispute because that nature dictates the required case presentation necessary to achieve a just result.

In conclusion, The Malaysian construction dispute resolution landscape has changed by the advent of the trinity of arbitration, statutory adjudication and specialist construction court. The change is definitely for the better. There are now vibrant options available but it requires wisdom and experience of counsel and client to select the appropriate one that best serves them.



[1] This is pursuant to arbitration agreements contained in the construction contract such as the PAM form of building contract, PWD forms of construction contracts, etc.

[2] Subordinates Courts Act 1948 (Act 92) and Courts of Judicature Act 1964 (Act 91).

[3] CIDB News Issue 2012 at 8.

[4] Act 746.

[5] Arbitration Act 1952 (Act 93) has been repealed and replaced by Arbitration Act 2005 (Act 646).

[6] s 4(1) and 9(1) Arbitration Act 2005.

[7] s 9(3) and 9(4) Arbitration Act 2005.

[8] Cl 66.4 PWD 203/203A (Rev 1/2010) contract.

[9] Cl 66.1 and 66.3 PWD 203/203A (Rev 1/2010) contract.

[10] Cl 34.1 PAM 2006 contract.

[11] s 38 Arbitration Act 2005.

[12] s 36(1) Arbitration Act 2005. See also cl 34.11 PAM 2006 contract and cl 66.8 of the PWD 203/203A (rev 1/2010) contract.

[13] s 37 Arbitration Act 2005.

[14] s 3 and s 41 and 42 Arbitration Act 2005.

[15] s 2(1) Arbitration Act 2005.

[16] Ibid.

[17] s 20 Arbitration Act 2005.

[18] For example, KLRCA Rules of Arbitration 2012 or KLRCA Fast Track Rules of Arbitration 2012.

[19] s 2 Evidence Act 1950 (Act 56).

[20] Zublin Muhibbah Joint Venture Sdn Bhd v Government of Malaysia [1990] 3 MLJ 125, but see also Re Mohamed Azahari Matiasin [2011] 2 CLJ 630.

[21] Bechtel International Inc. v Malaysia Newsprint Industries Sdn Bhd  (2006) High Court unreported.

[22] Lim: Jurisprudence behind the CIPAA – The Law Review 2012 at 550.

[23] s 2 to 4 CIPAA and see also Lim: The Legal Implication of CIPAA – KLRCA Newsletter Jul-DEC 2012 issue at 9-10.

[24] s 28 CIPAA.

[25] s 15 CIPAA.

[26] s 28 to 31 CIPAA.

[27] s 25 (d) and (i) CIPAA.

[28] s 21 to 23 CIPAA.

[29] Registered pursuant to s 8 of the Quantity Surveyors Act 1967 (Act 487).

[30]s 8(3) CIPAA.

[31] s 20 CIPAA.

[32] By the Chief Registrar’s Circular no 1/2013, all civil claims below RM1,000,000.00 are also within the jurisdiction of the subordinates court.

[33] Chief Registrar’s Circular no 2/2013.

[34] Ops Suria (EM) Sdn Bhd v Ayuda Engineering Services Enterprise Sdn Bhd [2012] 4 CLJ 670.

[35] s10 Arbitration Act 2005.

[36] Thamesa Design Sdn Bhd v Kuching Hotels Sdn Bhd [1993] 3 MLJ 25.

[37] Rehearing based only on documentary appeal record, see Samar Binte Mansor v Mustafa Kamarul Ariffin [1974] 2 MLJ 71and the Appellate Courts will unlikely disturb the findings of fact of the High Court.

[38] s 37 CIPAA.

[39] S 16 CIPAA.

Lim_Chong_Fong
Lim Chong Fong

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