Stay Applications against Adjudication Decisions: Issues and Developments (Part 1)

INTRODUCTION

The quintessential element of an adjudication decision is that it is immediately binding and enforceable despite that the decision may be rough around the edges resulting from the speedy nature and the interim finality of the adjudication process. This is consistent with the ‘pay now, argue later’ ethos of adjudication and the appreciation that ‘cashflow is the lifeblood of the construction industry’ and that a successful party to an adjudication ought not to be deprived of the fruits of a favourable adjudication decision simpliciter. In this context, our courts take particular caution whenever it is asked to negate the effect of an adjudication decision because to do so freely and readily would effectively render the statutory provisions under the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) and the adjudication process futile.

This article will first explore the application of Section 16 CIPAA, the statutory provision that provides the mechanism for stay of an adjudication decision. Subsequently, discussion will be made to examine the implementation of the landmark decision of View Esteem Sdn Bhd v Bina Puri Holdings Bhd [2018] 2 MLJ 22 and some of the underlying rationales adopted by our courts when deciding applications for stay.

THE APPLICATION OF SECTION 16 CIPAA

Under s. 16 (1) of CIPAA, the losing party may apply for a stay of an adjudication decision (“Stay Application”) under two circumstances:

• under s. 16 (1)(a) when an application to set aside the adjudication decision (“Setting Aside Application”) has been made; or

• under s. 16 (1)(b) when the subject matter of the adjudication decision is pending final determination by arbitration or courts.

Difficulties may arise in determining whether s.16(1)(b) is satisfied where a Stay Application is made and a multi-tiered dispute resolution clause is activated but arbitration has yet to commence. There are conflicting positions on this issue. In the case of Raps Solutions Sdn Bhd v Itramas Technology Sdn Bhd and other cases [2022] MLJU 729, it was held that s. 16(1)(b) only applies when arbitration or litigation has lawfully commenced. In this regard, unless the conditions under the multi-tiered dispute resolution clause have been satisfied, the arbitration is not valid. On the other hand, it was held in the case of Maju Holdings Sdn Bhd v Spring Energy Sdn Bhd [2020] MLJU 1162, that it is unnecessary that arbitration proceedings must have actually commenced, or that condition precedents to the commencement of arbitration have been fulfilled. So long as there is evidence of the parties initiating final determination, s.16(1)(b) would be satisfied. However, in view of the parties’ bargain and intention to enter into an arbitration agreement subject to a multi-tiered dispute resolution clause, it may arguably be seen as an affront to the parties’ intention to deem that without the satisfaction of all preconditions to the commencement of arbitration, an arbitration is pending and s.16(1)(b) can be satisfied when an arbitration cannot yet be commenced. In any event, the conflict in this area of law could very well be settled by our courts in the near future.

The High Court in the case of Subang Skypark Sdn Bhd v Arcradius Sdn Bhd [2015] 11 MLJ 818 explained that only under the two situations specified under s.16 (1) CIPAA can a Stay Application be lodged and not otherwise. Where a Stay Application is made and at least one of the two limbs under s. 16 (1) is satisfied - s. 16 (2) becomes operative. In that, the High Court may, inter alia, then grant a stay of an adjudication decision. Just because one of the limbs under s. 16 (1) has been satisfied, it does not mean that the grant of the stay is automatic or as of right; the court still retains the discretion as to whether to grant a stay.

In the case of PWC Corp Sdn Bhd v Ireka Engineering & Construction Sdn Bhd and another appeal [2018] MLJU 152, the court opined that allowing a stay merely on the ground of a pending arbitration in the absence of special circumstances would defeat the object of CIPAA and statutory adjudication which is to facilitate regular and timely payment for work done and services rendered under construction contracts by providing a speedy intervening provisional process to resolve disputes. Hence, satisfying one of the limbs under s. 16 (1) merely prequalifies a Stay Application in which our courts must then consider whether there are any other factual circumstances that would justify a stay.

THE ADVENT OF VIEW ESTEEM

In the landmark case of View Esteem Sdn Bhd v Bina Puri Holdings Bhd [2018] 2 MLJ 22, the Federal Court held that s. 16 CIPAA affords a degree of flexibility, where each case ought to be determined on its merits without the fetter of a pre-determined test. A stay of an adjudication decision should be allowed only where there are “clear errors” or where “justice of the individual case is met”. It was held that the financial capacity of the winning party of an adjudication decision is one of the factors that can be taken into account, however, it should not be the only consideration when deciding whether the court should grant a stay. Accordingly, this article will proceed by discussing the scope and meaning of “clear error” and also some circumstances of interest that would fall within the purview of determining whether “justice of the individual case is met”.

A. CLEAR ERROR

i. Merits of an Adjudication Decision

With the advent of View Esteem, parties can obtain a stay where there are ‘clear errors’ in the adjudication decision. As such, two questions become relevant. First, what constitutes a ‘clear error’ warranting the grant of stay? Secondly, to what extent are our courts allowed to review merits of the adjudication decision?

Both these questions were answered in the case of EA Technique (M) Sdn Bhd v Malaysia Marine and Heavy Engineering Sdn Bhd [2021] 1 AMR 594. On the issue of ‘clear error’, the High Court affirmed its previous findings in the case of Maju Holdings Sdn Bhd v Spring Energy Sdn Bhd [2020] MLJU 1162, that a ‘clear error’ has not been clearly defined, nevertheless, such error must be so grave that it pricks the conscience of the court if it were left unrectified. A general example of ‘clear error’ is where the adjudicator had decided on the merits of the dispute in blatant disregard of statutory provisions or trite case law of the Federal Court.

On the extent in which our courts may review the merits of an adjudication decision, the High Court held that the Federal Court in View Esteem had opened the window but certainly not the flood gates to permit courts to review the merits of an adjudication decision under very rare and exceptional circumstances of error. The court opined that the size of this window cannot be ascertained because it would depend on the facts of each case. However, it must be borne in mind that our courts are not at liberty to review an adjudication decision in a Stay Application as if it were an appeal against the adjudication decision (see Enra Engineering and Fabrication Sdn Bhd v Gemula Sdn Bhd and another case [2020] 7 MLJ 482).

Accordingly, our courts must limit the grant of a stay on the grounds of ‘clear error’ of an adjudication decision only where the court’s conscience is pricked by the special circumstances of the case. Furthermore, the merits of an adjudication decision ought only to be reviewed under very rare and exceptional circumstances depending on the facts of each case and such review must not be done as though it were an appeal against the adjudication decision.

ii. Breach of Natural Justice and Excess of Jurisdiction of the Adjudicator

In the case of Vision Development Concept Sdn Bhd v Low Sheh Ling and another case [2021] 12 MLJ 193, the High Court noted that this was a rare case in which it had been successfully shown that there were clear errors in the making of the adjudication decision on the balance of probabilities warranting not only the stay of the adjudication decision but the setting aside of it as well. This was because the court had found that there was a denial of natural justice and the adjudicator had acted in excess of her jurisdiction.

In this regard, it was previously held in the case of Subang Skypark (which was decided before the advent of View Esteem) that the likelihood of success of a Setting Aside Application against an adjudication decision is not a relevant consideration in deciding a Stay Application. The case of Vision Development Concept, appears to conflict with Subang Skypark on this principle. In any event, it would seem reasonable for our courts to at the very least, take into consideration breaches of natural justice and/or where adjudicators act in excess of their jurisdiction when determining whether there are any ‘clear errors’ in the adjudication decision.

B. JUSTICE OF THE INDIVIDUAL CASE

i. Offering of Security Pending Arbitration Proceedings

It is settled that reference of the dispute to arbitration does not render the grant of a stay of an adjudication decision as an automatic right. Could, however, the subsequent act of offering security pending final determination constitute valid grounds for granting a stay?

This question was answered in the case of Econpile (M) Sdn Bhd v ASM Development (KL) Sdn Bhd and another summons [2020] MLJU 1146. In this case, the court held that offering a parcel of commercial development land as security pending the completion of arbitration proceedings which was not immediately liquidated, does not amount to special circumstances to allow the grant of a stay of the adjudication decision. This was because the successful party of the adjudication is under no obligation to accept the offer and in all likelihood, this would involve much discussion on terms of arrangement which would serve to deprive the successful party of enjoying the fruits of the adjudication decision.

If, however, the security offered was in a form more liquid in nature, would the court have decided the matter differently? This has largely been left unanswered. In this view, it is submitted that in view of the principles under View Esteem, such circumstances could very well constitute valid grounds which our courts may take into account when determining a Stay Application, especially where it is just to do so.

ii. Merits of the case in Arbitration or Litigation

In the case of Ceylon Builders Sdn Bhd v Ultimate Pursuit Sdn Bhd and another appeal [2018] MLJU 1918, the contention was raised that stay ought to be granted because there were serious defective work issues that ought to be decided in the arbitration proceedings. The court noted that this contention was subject to proof and can be raised at arbitration. However, in alignment with the “pay now and argue later” ethos of adjudication, regardless of the merits of a party’s case in litigation or arbitration, where an adjudication decision has been delivered against the said party, the monies ought to be paid first and thereafter the issues can then be ironed out during arbitration or litigation. As such, it can be seen that the merits of the case in arbitration or litigation generally would not constitute valid grounds for the grant of a stay.

iii. Where the Successful Party of an Adjudication Decision is based in a Foreign Country

In view of the rapid growth of the international construction industry, situations in which the successful party of an adjudication decision is based abroad could commonly arise. If such a party is based in a nation which is not a reciprocating country under the First Schedule of Reciprocal Enforcement of Judgments Act 1958, the losing party may inevitably face substantial risk of being unable to recover monies paid in the event the adjudication decision is later set aside or where final determination later rules in favour of the losing party of the adjudication decision.

This issue was explored in the recent case of Tecnicas Reunidas Malaysia Sdn Bhd v Petrovietnam Engineering Consultancy JSC (PVE) & Anor and other cases [2021] MLJU 2633. In this case, Tecnicas Reunidas Malaysia, the Plaintiff in making a Stay Application, adopted the ground that stay should be allowed because of its fear of the risk of enforcement difficulties against Petrovietnam Engineering Consultancy, the Defendant based in Vietnam. This is because Vietnam is not a part of the reciprocating countries with regard to the enforceability of foreign judgments. The court opined that because Tecnicas Reunidas Malaysia did not perceive this to be an issue when it contracted with the company based in Vietnam, the court held that such a ground is untenable and is a red-herring in determining the Stay Application.

In view of Tecnicas, our courts appear willing to consider matters that were known to the parties at the time of contract when determining a Stay Application. As such, grounds may be heavily scrutinised and/or even disregarded entirely if parties were made well aware of circumstances at the time of contract but later adopt the very same as grounds for a Stay Application. This line of reasoning shows similarities to the principle that even if evidence can show that the successful party of an adjudication decision is not in the financial position to repay the judgment sum when it falls due, the losing party should not be granted a stay if the successful party’s financial position is the same or similar to when the contract was entered. (See Herschell Engineering Limited v Breen Property Limited [2000] BLR 272; Subang Skypark)

CONCLUDING REMARKS

This article has highlighted the conflicting positions adopted by our courts in the application of s. 16(1)(b) CIPAA in the event there is an activated multi-tiered dispute resolution clause but where arbitration had yet to be commenced. Further, emphasis is drawn on the principle that the satisfaction of one of the limbs under s.16 CIPAA, will prequalify a Stay Application, however, a stay will not be granted without some other factual circumstances that would justify the stay.

As such, it is clear that our courts adopt the approach in determining Stay Applications on the factual circumstances and merits of each case without the fetter of a pre-determined test. Examples have been provided in this article so to illustrate some rationales adopted by our courts when determining Stay Applications. In this context, firstly, a ‘clear error’ which would warrant the grant of a stay is one which pricks the conscience of our courts if it were left unrectified. And valid considerations under a Setting Aside Application may also be relevant under a Stay Application. Secondly, offering securities pending final determination, especially if such securities are not immediately liquidated, will likely not constitute valid grounds for the grant of a stay because respective parties are not obligated to accept the terms of the security. Finally, our courts may consider the knowledge of parties at the time of contract and if those matters are later adopted as grounds in a Stay Application, our courts are likely to disregard those grounds.