Direct Payment against the Principal under CIPAA 2012 (Part 1)

How does this proceeding work?

If a subcontractor is not paid for work done by the main contractor, the general rule is that he is unable to claim directly from the employer. This is because the employer is not a party or privy to the subcontract. As such, he owes no contractual obligation to pay the subcontractor for the work done by the latter, even though he may benefit from work done.

One of the remedies afforded under CIPAA to a party who has obtained the adjudication decision in his favour (for ease of reference, we will refer him as “unpaid party”) against the other party who the adjudication decision was made against (for ease of reference, we will refer him as “non-paying party”) is to allow the unpaid party to request for direct payment from the principal.

This is provided for under Section 30 of CIPAA which provides:

30. Direct Payment from Principal

1) If a party against whom an adjudication decision was made fails to make payment of the adjudicated amount, the party who obtained the adjudication decision in his favour may make a written request for payment of the adjudicated amount direct from the principal of the party against whom the adjudication decision is made.

2) Upon receipt of the written request under subsection (1), the principal shall serve a notice in writing on the party against whom the adjudication decision was made to show proof of payment and to state that direct payment would be made after the expiry of ten working days of the service of the notice.

3) In the absence of proof of payment requested under subsection (2), the principal shall pay the adjudicated amount to the party who obtained the adjudication decision in his favour.

4) The principal may recover the amount paid under subsection (3) as a debt or set off the same from any money due or payable by the principal to the party against whom the adjudication decision was made.

5) This section shall only be invoked if money is due or payable by the principal to the party against whom the adjudication decision was made at the time of the receipt of the request under subsection (1).

Subsection 1 is self-explanatory. To invoke this proviso, the unpaid party must comply with 3 conditions:

1. The unpaid party must go through the adjudication process against the non paying party AND obtain an adjudication decision in his favour.

2. The non paying party has not paid the unpaid party.

3. He then issues a written request for payment for the amount awarded under the adjudication decision from the principal of that non paying party. This is provided under subsection 1.

The next phase under subsections 2 and 3 is on the principal:

(a) Under subsection 2, upon receiving the request for payment, the principal must serve a notice in writing to the non paying party.

(b) This notice must contain 2 things:

(i) to show proof that the non paying party has paid the unpaid party;

(ii) to state that direct payment will be made after expiry of 10 working days of the service of this notice.

(c) In the absence of proof of payment by the non paying party, the principal must pay the unpaid party the sum awarded in the adjudication. This is provided under subsection 3.

[see Cabnet Systems (M) Sdn Bhd v Dekad Kaliber Sdn Bhd & Anor [2020] MLJU 311]

In Cabnet Systems, the learned judge laid out 4 conditions under Section 30 of CIPAA:

1. The non paying party has failed to pay to the unpaid party the Adjudicated Amounts (1st Condition);

2. The unpaid party has issued the notice on the principal to make direct payments of the Adjudicated Amounts to the unpaid party (2nd Condition);

3. There are sums of money “due or payable” from the principal to the non paying party at the time of the receipt of the unpaid party’s notice by the principal (3rd Condition); and

4. The principal did not comply with the unpaid party’s notice by not paying directly the Adjudicated Amounts to the unpaid party (4th Condition).

Assuming the unpaid party has satisfied subsection 1 and the principal (and the non paying) still refuses to pay, the unpaid party may file an action against the principal under this section.

This is done by way of an Originating Summons.

[However, in Pembinaan Tuju Setia Sdn Bhd v Perfect Eagle Development Sdn Bhd [2020] MLJU 2039, the unpaid party commenced an action under Section 30 of CIPAA against the principal by filing a writ, rather than an OS. The learned judge dismissed an application by the principal to strike out the writ on grounds that the unpaid party should have filed an originating summons instead of a writ.]

Cabnet Systems also identifies who has the burden to establish the 4 conditions. In short, the unpaid party has to establish the 1st, 2nd and 4th Condition. Once he has done so, then the burden shifts to the principal to disproof the 3rd Condition:

“regarding the 3rd Condition - if X proves the first, second and fourth Conditions (“1st Condition”, “2nd Condition” and “4th Condition”), the evidential burden (not the legal burden) concerning the 3rd Condition shifts from X to Z. This is due to the application of s 106 EA”

In the future articles, we will discuss some of the common issues encountered in an application for direct payment from the principal before the courts.