MALAYSIA: An Introduction to Dispute Resolution: Construction

Construction 

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 forms. 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 sometimes preferred by foreign contractors or for projects with foreign interests. The IEM form of contract is usually adopted 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 through an addendum to the standard form contract. Larger developers and some state-owned entities may adopt bespoke contracts prepared in-house.

Because of their repeated usage, some provisions of these standard form contracts have been judicially interpreted. Other provisions that 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, so 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 currently three 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.

The constructions courts were set up in Kuala Lumpur in 2014, which was the same year 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, thereby 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 works if they are 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, such as provisions to regulate timing. These would include provisions on commencement and completion dates, and for the extension of the completion date upon the occurrence of certain events.

Provisions regulating timing have often been central to disputes in construction projects. A contractor’s entitlement to additional time to complete 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 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 two years, when the COVID-19 pandemic brought disruptions to project sites and supply chains.

Construction of Residential Buildings 

The construction and sale of residential buildings in the country are regulated by the Housing Development (Control and Licensing) Act 1966 (HDA) and its ensuing subsidiary legislation, the Housing Development (Control and Licensing) Regulations 1989 (the “1989 Regulations”), amongst others. Contracts for the sale of residential buildings are to be made in the forms prescribed in the 1989 Regulations. In recent years, the provisions of these prescribed forms have been the subject of judicial interpretation, particularly on the contractual compensation payable to purchasers due to delayed completion and provisions for the deviation of materials for the construction of residential buildings.

In the Past Two Years 

The construction industry recorded work amounting to MYR30.5 billion in 2022, but continues to be impacted by the implementation of multiple COVID-19 pandemic-induced restriction orders in the past two years. Restrictions on the employment of foreign workers and strict operating procedures being placed on project sites affected the progress of construction projects.

Lockdowns in China and the Russia/Ukraine war caused shortages of building materials such as steel, aluminium and copper, bringing about soaring prices for these materials.

With a shortage of labour and building materials, the progress of construction projects has naturally been affected. Unlike the initial years of the pandemic, when the loss of time correlated to the duration of lockdowns in the country, entitlement to time is less straightforward at the endemic phase, especially when some trades were permitted to continue, some had restrictions that slowed progress, and some were not permitted to work. The impact of each of these issues on contract completion dates would have to be considered individually.

The loss of time brings monetary consequences. Contractors may be entitled to time, but often not monetary compensation for such lost time. This is not necessarily fair, particularly when one descends the pecking order at site. The labour workforce may not be able to sustain itself without being compensated for the lost time.

The Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (COVID-19) Act 2020 (the “COVID-19 Act”), which aimed to moderate the impact of COVID-19 and related measures on certain contracts, has been applied and tested in courts. Section 7 of the COVID-19 Act allows a defence for the inability to perform contractual obligations due to COVID-19 preventative measures. For example, if established on the facts, this is a ground to injunct the calling of an unconditional on-demand bank guarantee. Furthermore, Section 35 of the COVID-19 Act provides an exemption period for the purposes of computing the duration for delivery of vacant possession of housing accommodation (residential buildings) and liquidated ascertained damages (LAD) for late delivery of vacant possession. Section 35 of the COVID-19 Act was considered and accepted by courts in defending claims for LAD during the statutory exemption period. That said, a party seeking refuge under the COVID-19 Act bears a weighty evidential burden in proving their entitlement to such protection.

Separately, in July 2022 the Malaysian government extended its initiative allowing Variation of Price (VOP) for escalated construction material prices for government construction contracts by adding 11 more building materials to the implementation of theVOP clause, to help address the rising prices of building materials.

Recovery  

All eyes are on the national budget for 2023. Mega infrastructure projects are expected to be revived, and a sizeable development budget for 2023 will provide much-needed support for the sector. It is anticipated that this would be a catalyst towards the recovery and growth of the construction industry.