MALAYSIA: An Introduction to Construction

Malaysia: Construction Disputes 

As with most commonwealth jurisdictions, construction related disputes are resolved by way of arbitration, litigation, or statutory adjudication. The introduction of statutory adjudication by way of the Construction Industry Payment Adjudication Act 2012 (CIPAA) which came into force on 15th April 2014 was intended to alleviate the cash flow issues faced by main contractors and subcontractors.

Statutory Adjudication and its Impact 

Whilst it appears that the introduction of statutory adjudication has made it easier for contractors to pursue their claims and recover monies for work done this does not necessarily mean that there has been a reduction in construction related arbitration and litigation disputes.

With the introduction of statutory adjudication, contractors seem less inclined to commence arbitration and or litigation. There are practical reasons for this trend. Arbitration is considered expensive and protracted. Litigation is said to be unsatisfactory for similar reasons, though less expensive than arbitration. But the most compelling reason for commencing statutory adjudication is the relatively low costs, the tight timelines and high percentage of success.

Further, the grounds for setting aside an adjudication decision are very limited and the Malaysian Courts have in support of the use of statutory adjudication been reluctant to set aside adjudication decisions or grant a stay of adjudication decisions. This essentially means that a contractor that successfully obtains an adjudication decision has every chance of being paid.

In addition, CIPAA provides for various remedies which are not contractually available to the contractor. For example, a contractor which successfully obtains an adjudication decision, the contractor can slow down the rate of work or in the case of a subcontractor, the option of pursuing a claim directly against the employer despite there being no privity of contract. It also appears that a party which has successfully obtained an adjudication decision and registered the same as a judgment of the High Court has the option of commencing winding up proceedings against the non-paying party.

In many instances, despite there being an adjudication decision in favour of the contractor, this does not result in the end of litigation or arbitration. Typically, the party that has to pay an adjudication decision will proceed to apply to set aside the adjudication decision and further seek a stay of the adjudication decision pending litigation or arbitration. It therefore appears that the introduction of statutory adjudication whilst it may have the impact of alleviating the cash flow issues, it does not appear to have the impact of reducing the amount of construction related arbitration and litigation.

Arbitration  

Most, if not all, standard form construction contracts in Malaysia contain arbitration agreements. Although these standard form contracts contain arbitration agreements which provide for the use of specific rules such as the PAM Arbitration Rules or the IEM Arbitration Rules, many construction contracts also adopt the AIAC Arbitration Rules. The AIAC Arbitration Rules have found increasing favour in Malaysia as it adopts the most recent and acceptable best practises globally.

The governing law in Malaysia is based on the Arbitration Act 2005 which draws a distinction between domestic and international arbitration. The Arbitration Act 2005 sets out powers of the arbitrator and also limits the instances by which the courts can intervene in the arbitration process.

The Arbitration Act 2005 also sets out the grounds on which an arbitration award can be set aside. When first gazetted, the Arbitration Act 2005 provided for an arbitration award to be set aside when the arbitrator failed to follow the applicable law as well as the grounds such as breach of natural justice, excess of jurisdiction, fraud, or bribery. Although, the ground to set aside an arbitration award on an issue of law was limited to domestic arbitrations, this ground has been repealed. It therefore appears that there are very limited grounds to set aside an arbitration award.

There has been an increase in the number of arbitrations in Malaysia as there appears to be a preference for arbitration over litigation. The primary reasons for this preference are confidentiality, finality, and the choice of arbitrators. Due to the nature of construction related disputes, many parties prefer to appoint arbitrators familiar with specialist knowledge. However, despite the apparent benefits of arbitration, issues have arisen as to costs involved and the delays in the delivery of the arbitration award. There have been a number of cases in Malaysia dealing with the issue and the impact of the late delivery of the arbitration award.

Construction Litigation 

Given the amount of construction related disputes, specialist construction courts have been set up. These courts are extremely busy as many parties now choose to litigate as opposed to arbitrate given the increased costs of arbitration. These construction courts not only deal with construction related disputes but also deal with applications for stay and or setting aside arising from adjudication decisions as well as application arising from arbitration related matters such as setting aside and enforcement applications.

As a result of the introduction of these specialist construction courts there appears to be move away from arbitration in smaller less complicated domestic disputes.

Construction Industry 

With the introduction of the statutory adjudication and specialist construction courts as well a reasonably robust arbitration infrastructure, Malaysia is well equipped to handle all sorts of construction related disputes and have competent lawyers, arbitrators, judges, experts, and other consultants to deal with such disputes. There are perhaps less projects in Malaysia than there were 3 to 4 years ago (before COVID) and this is primarily due to the current global economic headwinds. We anticipate this changing once the current economic concerns are settled as construction is a significant growth contributor to the Malaysian economy.