Adjudication: Failure to Cite the Correct Clause in Pleadings Proves to be Fatal

Introduction
In the recent Court of Appeal decision of JKP Sdn Bhd v Anas Construction Sdn Bhd and another appeal [2022] MLJU 2124, the Court of Appeal of Malaysia examined the consequence of a party’s failure to comply with the requirements set out in Section 5(2) of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”).

Brief Background Facts
Pursuant to a construction contract, the Appellant (“JKP”) had appointed the Respondent (“ACSB”) as the main contractor for a project known as “Cadangan Membina dan Menyiapkan Satu (1) Blok Pangsapuri 24 Tingkat Rumah Pangsa Kos Sederhana (392) Unit) di atas Tanah Tebusguna Kerajaan, Kampung Pisang Awak, Seksyen 4, Bandar Jelutong, Daerah Timur Laut, Pulau Pinang” (“the Contract”).

Disputes arose between the parties regarding the construction works, and the Contract was ultimately terminated. ACSB commenced several adjudication proceedings under CIPAA against JKP for payments under the Contract. In one of the adjudication proceedings (No: AIAC/D/ADJ-2469-2019), ACSB claimed from JKP the reimbursement of professional fees and charges payable to its consultants, MSY Engineering Consultant and ZNA Engineering Consultant amounting to RM855,074.21.

In the Payment Claim (“PC”) and the Adjudication Claim (“AC”), ACSB specifically pleaded clauses 28, 55 and 56 of the Contract as the basis of its claim against JKP. In the Contract, Clause 28 provides for the payment to the contractor and interim certificates, Clause 55 provides for the events and consequences of default by the employer, and Clause 56 provides for the certificate of termination costs.

JKP, on the other hand, in its Adjudication Response (“AR”), contended that the most relevant provision in the Contract pertaining ACSB’s claim would be Clause 36.5. It was JKP’s case in the adjudication proceeding that ACSB did not invoke said provision to support its claim.

The adjudicator eventually delivered an Adjudication Decision (“AD”) in favour of ACSB and allowed a sum of RM795,013.78 to be paid by JKP to ACSB. Essentially, the adjudicator in the AD agreed that ACSB’s claim could not be sustained under clauses 28, 55 and 56 of the Contract. However, the adjudicator further decided to allow ACSB’s claim based on Clause 36.6 of the Contract. According to the adjudicator, Clause 36.6 of the Contract was most applicable in ACSB’s claim. It is pertinent to note that Clause 36.6 of the Contract was not relied upon by ACSB in the PC or the AC.

Dissatisfied with the AD, JKP filed an application in the High Court to set aside the AD. At the same time, ACSB filed an application to enforce said AD.

High Court Findings
In the High Court, JKP sought to set aside the AD on the grounds that the adjudicator had acted in excess of jurisdiction, had not acted independently or impartially, and that there had been a denial of natural justice. In essence, the High Court allowed ACSB’s application to enforce the AD, and dismissed JKP’s application to set aside the AD. The learned High Court Judge found that the adjudicator had not acted in excess of his jurisdiction because:

“21. Walaupun klausa 36.5 dan klausa 36.6 ini tidak diplidkan ianya tidak mencacatkan kes Defendan kerana fakta material yang Construction Contract itu diplidkan sudah mencukupi. Lagipun hanya klausa 36.5 dan 36.6 yang relevan dalam prosiding ini untuk pertimbangan Adjudikator tidak dengan klausa-klausa yang lain.

22. Jadi Mahkamah ini dapati yang pihak Adjudikator tidak bertindak di luar bidangkuasanya.”

Dissatisfied with the High Court’s decision, JKP appealed both decisions of the High Court to the Court of Appeal.

Court of Appeal Findings
The Court of Appeal had to decide on two issues, i.e. (i) whether the adjudicator had acted in excess of his jurisdiction, and (ii) whether there had been a denial of justice. The Court of Appeal allowed both appeals of JKP. In coming to its decision, the Court of Appeal made the following findings:

Issue #1: Whether the adjudicator had acted in excess of his jurisdiction

(a)    ACSB’s claim against JKP before the adjudicator was premised on clauses 28, 55 and 56 of the Contract. There was no mention of clauses 36.5 or 36.6 of the Contract;
(b)    It was expressly or implicitly agreed that clauses 28, 55 and 56 of the Contract did not apply to the ACSB’s claim. The adjudicator was of the opinion that clause 36.6 of the Contract was most applicable to ACSB’s claim;
(c)    Without ACSB’s pleading its claim under the said provision and without inviting the parties to comment or submit on this issue, the adjudicator allowed ACSB’s claim against the JKP;
(d)    Since Clause 36.6 of the Contract was not stated in the PC, it is clear that the requirements under section 5(2) of CIPAA were not complied with. The failure to state that ACSB was relying on clause 36.6 of the Contract in the PC was a clear manifestation of statutory noncompliance;
(e)    ACSB’s failure resulted in the adjudicator not having jurisdiction to adjudicate on the said clause;
(f)    Clause 36.6 of the Contract was not pleaded in the AC, which is fatal to ACSB’s case. It is clear from the Federal Court’s decision in View Esteem Sdn Bhd v Bina Puri Holdings Bhd [2018] 2 MLJ 22 that the adjudication pleadings in Sections 9 to 11 of CIPAA are pivotal and not mere formal manifestations of the dispute;
(g)    As such, the adjudicator had acted in excess of his jurisdiction when he decided on matters which were never raised and pleaded in the PC and all the adjudication pleadings.

Issue #2: Whether there had been a denial of justice

(a)    It was not disputed that the adjudicator did not invite the parties to submit whether he was at liberty to rely on Clause 36.6 of the Contract, to which the parties never pleaded;
(b)    The adjudicator went on a frolic of his own and failed to apply the rules of natural justice. It was found that the adjudicator had committed a material breach of the rules of natural justice by failing to notify or bring to the attention of the parties that he was relying on the un-pleaded Clause 36.6 of the Contract, which was the basis of his decision to allow ACSB’s claim, without allowing the parties the opportunity to comment or to take their respective stands;
(c)    Even though the law bestows the inquisitorial power to the adjudicator to take the initiative to ascertain the facts and the law required for his decision, such power does not extend to enable the adjudicator to unilaterally cherry-pick a specific clause of the underlying contract to make out a cause of action for a claimant where the claimant has been put on notice that the clauses relied upon are not applicable.

Commentary
The Court of Appeal’s decision in this case had certainly provided a clear illustration on the importance of citing the accurate clause of the contract and/or cause of action in adjudication pleadings, as failure to do so will be fatal to a party’s case. As such, parties in adjudication proceedings must be meticulous in drafting its payment claim by ensuring that the correct clause in a contract and/or cause of action is referred in the payment claim and in any other pleadings in an adjudication proceeding.

About the author

Ooi Hui Ying
Senior Associate, Arbitration,
Construction & Engineering Disputes
Harold & Lam Partnership
[email protected]