Direct Payment against the Principal under CIPAA 2012 (Part 2)

In this article, we explore what happens if the principal fails to issue the written notice under section 30(2) of CIPAA.

The above issue was raised and considered in HSL Ground Engineering Sdn Bhd v Civil Tech Resources Sdn Bhd and another summons [2020] MLJU 717.

In this case, HSL Ground Engineering Sdn Bhd ("HSL") was appointed by Civil Tech Sdn Bhd (“CT”) to carry out bore piling works for the SUKE Expressway Project. There were many layers of parties from the ultimate owner down to HSL. Suffice to say, HSL was awarded the works by CT. CT in turn was awarded his works by Civil Tech Resources Sdn Bhd (“CT Resources”). The subcontract between CT and HSL was mutually terminated. However, there were outstanding unpaid works due to HSL from CT arising from both the subcontract and a separate rental agreement between them.

HSL obtained 2 adjudication decisions in their favour against CT, one under the subcontract and rental agreement respectively. CT refused to pay HSL albeit the adjudication decisions.

Thus, HSL served on CT Resources the notices under section 30(1) of CIPAA requesting payment directly from the principal. CT Resources did not pay HSL. And so HSL bought the two actions against CT Resources.

CT Resources did not issue any notices to CT under subsection 2 of CIPAA. However, CT Resources contends that there is no money due or payable by them to CT.

As stated in our earlier article:

1. Once an unpaid party who has an adjudication decision in his favour, issues a written notice to the principal under section 30(1) of CIPAA, the proverbial ball is in the principal’s court.

2. Under section 30(2), the principal must issue a written notice to the non-paying party asking, among others, for proof of payment by the latter.

3. In the absence of such proof of payment, the principal must pay the unpaid party the sum awarded in the adjudication. This is provided under section 30(3).

But what happens if the principal fails to issue the written notice to the non-paying party as mandated under section 30(2)? The learned high court judge held that such failure attracts 2 outcomes:

1. He must pay the unpaid party under section 30(3);

2. It would be fatal to the principal’s defence under section 30(5) that there are no monies due and owing to the non-paying party.

This pronouncement is consistent with earlier decisions:

CT lndah Construction Sdn Bhd v BHL Gemilang Sdn Bhd  [2019] MLJU 1215 CA

“In fact, an obligation imposed by statute, in this case by subsection 30(3) of CIPAA, is stronger (than an obligation arising under contract) because in the absence of proof of payment by BHL Builders as requested by the respondent under subsection (2), it becomes mandatory for the respondent as the principal to pay the adjudicated sum of RM9,065,335.67 to the appellant. It is a requirement of law which the respondent has no discretion not to comply with it.” - per Abdul Rahman Sebli JJCA, para 15

PCOM Pacific Sdn Bhd v Apex Communications Sdn Bhd & Anor [2020] MLJU 118

HMN Nadhir Sdn Bhd v Jabatan Kerja Raya Malaysia & Ors [2018] 1 LNS 1938

However, Glocal Tech Engineering Sdn Bhd v Panzana Enterprise Sdn Bhd [2021] MLJU 474 seems to depart from the above authorities.

In the case of Glocal Tech, the principal – Panzana Enterprise Sdn Bhd (“Panzana”) did not issue any written notice under section 30(2) after having received the notice of request for direct payment from Glocal Tech Engineering Sdn Bhd (“Glocal”). Panzana however contends that subsection 30(5) (i.e: whether there is any money due or payable from principal to the non-paying party) must be fulfilled before the statutory obligation for notices under subsections (2) and (3) are triggered.

The learned judge agreed with Panzana’s contention:

“ [34]  In my view, the opening words in  sub-s 30(5) CIPAA viz. “This section shall only be invoked if …” clearly denote a mandatory condition that an applicant seeking direct payment from the principal can only invoke the provision under  s 30 CIPAA if there is money is due or payable by the principal to the party against whom the adjudication decision was made at the time when the principal received the written request for direct payment of the adjudicated amount.”

In this case, the learned judge agreed that there was no money due or payable by Panzana to MKP and therefore Glocal’s application for direct payment was dismissed even though Panzana did not satisfy the notice under section 30(2).

The most recent decision on this issue is Zeta Lektrik Sdn Bhd v JAKS Island Circle Sdn Bhd [2022] MLJU 392, which follows the ratio of CT Indah and PCOM.

Then there is the case of Cabnet Systems (M) Sdn Bhd v Dekad Kaliber Sdn Bhd & Anor [2020] MLJU 311.

As stated in Part 1 of our article on direct payment, in Cabnet Systems, the learned judge laid out 4 conditions under section 30 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).

“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 this case, the learned judge held that only after the principal has failed to make direct payment to the unpaid party under subsection 3 does the evidential burden shift to the principal to show that there are no monies due or payable from him to the non-paying party.

(c/f with Glocal Tech, there the learned judge held that section 30 of CIPAA can only be invoked if there is money due or payable by the principal, which suggests that this evidential burden is a condition precedent before issuance of any notices under section 30)