Speedy enactment of payment for the construction industry

The Master Builders Association Malaysia (MBAM) is pressing the Malaysian government for new legislation to deal with speedy payments within the construction industry due to the looming worldwide financial crisis.

Malaysia has been formulating a proposed Construction Industry Payment and Adjudication Act (CIPAA) for some time as several other countries have a similar act. They include New Zealand, the UK, Australia and Singapore. It appears that much of their act will be modeled on that of the New Zealand Construction Contracts Act 2002 (CCA).

The Act covers every construction, demolition and maintenance contract in New Zealand including buildings, roads, energy and services reticulation, mechanical, electrical and civil projects: in other words the management of our total infrastructure system.

The key to working within the CCA is correct documentation and understanding what it means. It starts with the contract documents, which should state the number of progress payments, intervals between payments, amount of each payment and the date each payment becomes due, otherwise for commercial projects, if these are not covered, the default provisions of the Act apply.

The major instruments of the Act are the Payment Claim and the Payment Schedule. The Payment Claim is the written claim by a payee (contractor or subcontractor etc.) to the payer (owner or contractor) for payment for work done. This claim must be in writing, identify the construction contract and the relevant period to which it applies, indicate a claimed amount and due date for payment and state that it is made under the CCA. For a residential contract the claim must be accompanied by written explanations of the process and the consequences of not responding or paying. The Payment Schedule is the payer’s response to the payee. To be valid the schedule must be in writing, identify the Act, identify the Payment Claim to which it relates and indicate a scheduled amount. If the scheduled amount is different from the claimed amount, the schedule must indicate how the amount was calculated, the reason for the difference and the reason for withholding payment. The scheduled payment must then be made within the timescale of the contract. Engineers and project managers need to be aware of these details of the Act, lest they be taken to task for negligence.

A poignant lesson to all those involved with administering construction contracts is the case of Canam Construction Ltd and George. The latter party was the principal of the contract who engaged a representative to act on its behalf, as many building professionals are routinely engaged to do. A summary of the lessons to be learnt in this case is as follows:

• A Payment Claim (in accordance with the CCA) submitted by a contractor must be paid by the principal, or if disputed, that must be done by way of a Payment Schedule as described above. No amount of correspondence that may be seen to be correct in terms of the conditions of contract is acceptable in the absence of a valid Payment Schedule.
• Based on the “pay now and ask questions later” principle any associated disputes that lead to the principal not wanting to pay the full amount of the Payment Claim would have to be dealt with separately, possibly by going to adjudication as described below.
• To have these disputes brought in as an integral part of the payment in question, they would need to be properly written into the Payment Schedule.
• In the event of not accepting the amount claimed in the Payment Claim the Payment Schedule must indicate a scheduled amount that the payer proposes to pay. Valuation certificates and the like are not acceptable. These only form part of evidence to justify a Payment Schedule.
• Building professionals need to note that a Payment Schedule must be issued by the payer, usually the principal to the contract – the party to the contract that is liable for the payment. This flies in the face of standard contract procedure whereby the Engineer to the contract acts on behalf of and signs all documents on behalf of the principal. In practice, this would mean continuing to do all the usual preparation work and filling in the details of the Payment Schedule, but submitting the Payment Schedule under the name of the principal (which has to be the payer) and with the signature of the payer.

Should there be a dispute about the claim or payment or other items related to the building contract, the CCA allows another form of dispute resolution: that is Adjudication.

Adjudication under the CCA is different from other existing forms of dispute resolution such as mediation, arbitration and litigation in the courts. It was designed to be neutral and confidential but also quicker, easier and cheaper than the other forms of dispute resolution. Adjudicators need to have a good understanding of practical building processes, how the industry operates, building law and general law pertaining to such things as evidence. This is why engineers, architects and other building professionals, with specific training often make good adjudicators. In practice there are very few building professionals who are not affected by the Act.

Although Adjudication is a relatively new process, there are now a number of trained Adjudicators throughout New Zealand. How you select a trained Adjudicator depends on whether the parties agree or not. If the parties agree, then whoever they agree on, can be simply selected by approaching that Adjudicator directly.