The subcontractor wins an adjudication against the main contractor, and asks the employer to pay him the awarded amount. The employer says it does not owe money to the main contractor, because it has claims against the main contractor after terminating the main contract. The main contractor disputes the termination. Will the courts – in the subcontractor’s direct payment application – decide who is right and who is wrong in the main contract dispute in order to ascertain whether money is owed to the main contractor (and hence can be paid directly to the subcontractor)? The Court of Appeal dealt with this recently in JDI Buildtech (M) Sdn Bhd v Danga Jed Development Malaysia Sdn Bhd [2024] CLJU 373.
By way of background, section 30 of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) gives the winner of the adjudication a recourse to claim direct payment of the adjudicated amount from the “principal” of the losing party, therefore bypassing the latter. To be in line with the facts in JDI Buildtech, I shall refer to the winner as the “subcontractor”, the losing party as the “main contractor”, and his principal as the “employer”.
The recourse of direct payment is subject to there being money “due or payable” by the employer to the main contractor; the idea is that then the money can be paid direct by the employer to the subcontractor and then deducted in the accounting between the employer and the main contractor. For convenience, I shall use the word “due” to represent the concept of “due or payable”.
Section 30 also stipulated a procedure for claiming direct payment, which is elaborated later on below.
The subcontractor in JDI Buildtech applied for an order under section 30 to compel the employer to pay the adjudicated amount direct to the subcontractor. The decision of the Court in that case is notable on 3 fronts:
a) the proper approach in a section 30 application to determine whether there is money due from the employer to the main contractor, when this issue is in dispute at the main contract level;
b) whether the section 30 procedural regime is subject to there being such money being due in the first place; and
c) whether the prohibition against conditional payment under section 35 of CIPAA applies in CIPAA adjudications only, or also in litigation and arbitration.
Whether There is Money Due from Employer to Main Contractor In View of Main Contract Dispute
Under section 30, the employer will only be required to make direct payment to the subcontractor if there is money due from the employer to the main contractor.
The Court considered that there are two situations where there will be no such money due– (i) the employer has already paid the main contractor; and (ii) there is a bona fide dispute between the employer and the main contractor such that it cannot be said that there is money due from the former to the latter (para 47).
An example of situation (ii) is the case at hand, where both the employer and main contractor purported to terminate the main contractor; hence, the question whether the employer owed money to the main contractor hinged on a determination as to whose termination was the valid one. Such a determination should be made in the arbitration or litigation between those parties.
For the purposes of a section 30 application however, the existence of a bona fide dispute between the main contract parties would mean that there is no clear evidence of money due from the employer to the main contractor. Consequently, the subcontractor has failed to prove this condition and its application for direct payment would fail. See paras 56, 65, 93, 110.
In adopting this approach, the courts in a section 30 application will not be determining whose termination is the lawful one. Instead, the courts will look at it from an evidential perspective – whether there is sufficient proof of money due – without deciding on the merits of the main contract dispute.
Whether Procedural Regime Subject to There Being Money Due from Employer to Main Contractor
Under the procedural regime of section 30, once the employer receives a request from the subcontractor for direct payment, he has to ask the main contractor for proof that the subcontractor has been paid the adjudicated amount. If no such proof is received within 10 working days, the employer is required to pay the amount direct to the subcontractor.
The Court has clarified that this procedural regime is subject to the pre-condition that there must be money due from the employer to the main contractor in the first place. Absent such money, the procedural regime does not apply (paras 23, 46, 50). Flowing from this, the employer would not be in default if he does not carry out any step of the procedure concerned.
Whether Section 35 Prohibition against Conditional Payment applies in Litigation and Arbitration
Section 35 provides that any conditional payment provision in a construction contract shall be void. Conditional payment was discussed by the Court because one of the issues in the main contract dispute was a clause allowing the employer to withhold payment to the main contractor after the main contract has been terminated, which extended to payment for work done prior to termination.
The Court was inclined to treat the section 35 as being applicable in CIPAA adjudications only, but not in arbitration or litigation where the freedom to contract should prevail (para 121). However, this expression of inclination is obiter dicta as the Court also acknowledged that it is a matter for the dispute resolution forum between the main contract parties (para 113).
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