MALAYSIA: An Introduction to Dispute Resolution: Construction

Construction – Practice Area Overview 

In Malaysia, disputes in construction projects are largely resolved by arbitration, through the courts, mediation and statutory adjudication. Other forms of alternative dispute resolution such as expert determination are also utilised, but not as widely.

Construction contracts in Malaysia typically adopt standard form contracts. The commonly used standard forms of contract are the Pertubuhan Arkitek Malaysia Conditions of Contract (more popularly known as the PAM Conditions) and the Public Works Department (PWD) form of building contract. The FIDIC forms of contract are used by international contractors. The IEM form of contract is sometimes applied for engineering works. These standard form contracts would commonly be amended for the specific needs of a project, either through overriding terms in an accompanying letter of award, or an addendum to the standard form contract. Larger developers and some state-owned entities may adopt in-house prepared bespoke contracts.

Because of its repeated usage, some provisions of these standard form contracts have been judicially interpreted. Other provisions which are similar or comparable to standard form contracts used abroad do benefit from judicial interpretation of those foreign standard form contracts, such as the JCT Standard Building Contract in the United Kingdom.

Dispute Resolution 

Most sizeable construction contracts contain arbitration agreements. Thus, construction disputes are largely resolved in arbitration. The Malaysian courts have taken a facilitative approach to arbitration, leaning against intervention unless specifically permitted by the Arbitration Act 2005. There is no provision for an appeal against an arbitration award. Enforcement of an arbitration award is facilitated internationally by Malaysia being a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention.

A viable alternative to arbitration is the state court. There are presently 3 specialist construction courts in Malaysia, two in Kuala Lumpur and one in Shah Alam. With specialised knowledge of construction law, these courts hear and dispose of construction disputes with remarkable efficiency and consistency. The judgments of these construction courts represent a large part of the construction law jurisprudence in Malaysia.

In 2014, which was the same year that the construction courts were set up, the Construction Industry Payment and Adjudication Act 2012 (CIPAA) came into force. CIPAA introduced statutory adjudication for construction disputes, with the aim of expeditiously resolving payment disputes in construction projects and by that, providing cashflow to contractors and sub-contractors to complete projects. CIPAA also introduced default payment mechanisms with the same aim of facilitating cashflow.

The statutory adjudication regime under CIPAA complements arbitration and the state courts as a dispute resolution mechanism. It has been widely used.

Under the CIPAA regime, payment disputes are to be resolved within about 100 working days. Enhanced enforcement options are also made available under CIPAA. Armed with an Adjudication Decision issued under CIPAA, a contractor may seek payment not only from its immediate contracting party, but also against the principal of that contracting party. The contractor also has the option of suspending their works if not paid on an Adjudication Decision. These are powerful enforcement tools made available under CIPAA.

Construction Contracts 

Properly considered construction contracts, whether bespoke or in standard form, would usually contain several essential features. One essential feature is provisions to regulate time. This would include provisions on commencement and completion dates, and for extension of the completion date upon the occurrence of certain events.

Provisions regulating time have often been central to disputes in construction projects. A contractor’s entitlement to additional time to complete their works may be accompanied by monetary compensation, sometimes referred to as loss and expense claims. On the other hand, a contractor not entitled to additional time to complete their works may be exposed to contractual liquidated damages or general damages for the delayed completion.

Such provisions have been brought into sharp focus in the past 2 years.

In the Last 2 Years 

On 18 March 2020, Malaysia had its first national lockdown due to the global coronavirus pandemic (“COVID-19”). Since then, the country has gone through a few phases of lockdowns with differing rules and procedures for each. As with other jurisdictions, unprecedented national measures were imposed to curb COVID-19 cases in Malaysia. The consequences were far-reaching, and extended beyond the duration of those measures. Progress of construction projects were naturally affected. With the loss of time came the monetary consequences.

Provisions regulating time continue to be tested under these unprecedented circumstances. Most standard form construction contracts treat events arising from COVID-19 and the national COVID measures as neutral events. The contractors may be entitled to time, but usually not monetary compensation for the lost time. Not necessarily fair, particularly when one descends the pecking order at site. The labour workforce may not be able to sustain themselves without being compensated for the lost time.

In fact, entitlement to time is not a certainty. The various phases of lockdowns have differing impact on different contractors. Some trades were permitted to continue, some with restrictions that slowed progress, and some were not permitted to work. The impact of each of these on the contract completion date would have to be considered individually.

‘Force majeure’ clauses also drew focus during this period because of the pandemic.

The prolonged period of construction projects exposed developers and contractors to the risk of fluctuating material prices. The slowdown of import and delivery of materials did not assist.

The Malaysian government introduced the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (COVID-19) Act 2020 (“COVID-19 Act”) to moderate the impact of COVID-19 and COVID measures on certain contracts. For example, a party is prohibited from exercising its contractual rights or remedies if the counterparty is unable to perform its contractual obligations due to COVID measures.

Further, to ease the burden on the construction sector, the Malaysian government introduced an initiative through the ‘Pakej Perlindungan Rakyat dan Pemulihan Ekonomi’ (which is also known as the PEMULIH programme) to allow Variation of Price (VOP) clauses to be included for government projects due to the rise in construction materials prices until 31 December 2021.

Recovery  

The Malaysian government has committed to the largest budget ever for 2022. This will see increased spending across many sectors, including in construction projects. It is anticipated that this would be a catalyst towards recovery and growth of the construction industry.