Case Analysis by VCC: Lion Pacific Sdn Bhd v Pestech Technology Sdn Bhd [2022] MLJU 2109

This case concerns an appeal against the High Court’s decision in allowing the Respondent’s application to enforce the Adjudication Decision dated 30.10.2019 (“Adjudication Decision”) and dismiss the Appellant’s application to set aside and/or stay the Adjudication Decision. The appeal concerns the following issues:

• Whether CIPAA applies to a subcontract if its main contract was entered into prior to CIPAA coming into force (“Appeal Point 1”);

• Whether the Adjudicator exceeded his jurisdiction by incorporating a new contractual term into the Subcontract (“Appeal Point 2”)?; and

• Whether there are clear and/or manifest errors in the Adjudication Decision (“Appeal Point 3”)?

A. FACTS

On 22.1.2013, the Malaysian Government appointed Konsortium Skypark Link Sdn Bhd-Lion Pacific Sdn Bhd (“Consortium”) as Main Contractor for a construction project (“Project”) [“Government Contract”].

On 7.10.2013, the Consortium appointed the Appellant as the subcontractor (“Main Contract”). On 24.11.2014, the Appellant appointed the Respondent as its subcontractor (“Subcontract”).

The Respondent commenced an adjudication proceeding against the Appellant. The Adjudicator delivered the Adjudication Decision in favor of the Respondent.

Subsequently, the Respondent's application to enforce the Adjudication Decision was allowed; whereas the Appellant’s application to stay and/or set aside the Adjudication Decision was dismissed. Hence, the present appeal.

B. Appeal Point 1: Whether CIPAA applies to the Subcontract

The question for determination is whether CIPAA has application to the Subcontract since the Main Contract (which forms part of the Subcontract) was entered into on 7.10.2013, prior to 15.4.2014.

It is indisputable that CIPAA would not apply to contracts entered into prior to 15.4.2014 (Jack-In-Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd [2020] 1 CLJ 299, Federal Court). In short, CIPAA is prospective in nature. The Respondent applied this principle by relying on the date of the Subcontract.

On the other hand, the Appellant claimed that the Adjudicator has no jurisdiction as CIPAA does not apply to the Subcontract because, inter alia:

1. the Main Contract was entered before CIPAA came into force;

2. the terms and conditions of the Main Contract are equally applicable to the Subcontract; and

3. the Respondent was a party to the Main Contract.

The Court of Appeal held in favor of the Respondent and concluded that CIPAA is applicable to the Subcontract because:

1. the Main Contract and the Subcontract are separate contracts;

2. the Subcontract was concluded on 24.11.2014 (after enactment of CIPAA);

3. all the rights and obligations arose solely from the Subcontract (not the Main Contract); and

4. the mere fact that all the provisions of Main Contract are incorporated into the Subcontract did not mean that parties had entered into the Main Contract.

C. Appeal Point 2: Whether the Adjudicator has acted out of jurisdiction

Under the Subcontract, Clause 4.1 states that the Ministry of Transportation’s (“MOT”) certificate is the only document required to confirm whether the Respondent had completed its works and thus entitled to payment (“Clause 4.1”).

The Adjudicator decided that Clause 4.1 is void as it is prohibited by section 35 CIPAA. That being the case, the Adjudication Decision was held in favor of the Respondent.

The question for determination is whether the Adjudicator had misinterpreted Clause 4.1 requiring MOT’s certificate?

The Court of Appeal decided that Clause 4.1 is not invalidated by section 35 CIPAA because:

1. the Adjudicator had misconstrued section 35 CIPAA by saying that it applies to not just ‘pay when paid’ clause but also to ‘pay when certified’ provision;

2. Clause 4.1 is not a ‘pay when paid’ clause caught under section 35 CIPAA;

3. Clause 4.1 cannot be construed as a conditional payment clause as the mutual agreement of the parties was that the Appellant’s obligation to make payment would only arise upon certification of the works done by the MOT; and

4. Notwithstanding the object of CIPAA being to facilitate prompt payment, the contractual obligations as expressly agreed upon cannot be disregarded.

The Adjudicator’s misconstruction of Clause 4.1 amounted to the incorporation of a new contractual term into the Subcontract which parties had not mutually agreed.

If the Adjudicator had interpreted Clause 4.1 correctly, the Respondent’s claim would have been dismissed because there was no default by the Appellant in making payment since such obligation only arises upon the MOT’s certification.

For the reason above, the Court held that the Adjudicator and the High Court Judge had erred in holding that Clause 4.1 is invalidated by section 35 CIPAA as it went beyond the express intention of the contracting parties.

D. Appeal Point 3: Whether there was clear and/or manifest error?

The Appellant says that there was purported denial of natural justice to the Appellant by the Adjudicator due to the Adjudicator’s failure to interpret Clause 4.1 and appreciate that there was no pay when paid clause in the Subcontract.

As a result of such misinterpretation, the Adjudicator had unilaterally incorporated new terms into the Subcontract.

More importantly, the Appellant was never asked to address this issue which was material to the Adjudicator’s final decision. The Appellant should have been afforded a right to be heard.

For the reasons stated above, the Court held that the High Court Judge had erred in not appreciating the Adjudicator’s failure to consider the fundamental element of the Appellant’s defence, i.e., the non-entitlement of the Respondent to its claim in absence of MOT’s certificate pursuant to Clause 4.1 (as explained in Appeal Point 2).

Had the Adjudicator given due consideration to such defence and to the interpretation of Clause 4.1, it would have made a material defence to the Adjudication Decision.

Based on the above, the Court had allowed the appeal.

E. ANALYSIS

It is interesting to see the Court’s position in respect of the applicability of CIPAA when a project has a main contract dated pre-CIPAA and a subcontract dated post-CIPAA.

In this appeal, the Appellant’s position was that CIPAA does not apply to the Subcontract because:

1. both the Subcontract and Main Contract involve the same parties;

2. the terms and conditions of the Main Contract are equally applicable to the Subcontract;

3. that being the case, the Main Contract and the Subcontract shall be deemed as a single transaction.

On the other hand, the Respondent’s position was that the date of the Subcontract should be the relevant date (and not the Main Contract). Since the Subcontract was entered into after CIPAA came into force, CIPAA shall be applicable to the Subcontract.

This position taken by the Court of Appeal in this case, after considering respective parties’ position, confirms the trite principle in Jack-In-Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd [2020] 1 CLJ 299, i.e., that CIPAA is prospective in nature.

It further affirms the position despite having a main contract in the same project that has been entered into prior to the enactment of CIPAA.

This case also demonstrates that if an adjudicator has gone on a frolic by misinterpreting any contractual terms, facts and/or law, the court is very much willing to set aside the Adjudication Decision.