CIPAA 2012: Mitigating Payment Issues within The Construction Industry

 CIPAA 2012: Mitigating Payment Issues within The Construction Industry

 

Datuk Professor Sundra Rajoo, Director of Kuala Lumpur Regional Centre for Arbitration (KLRCA) shares with iProperty.com on how CIPAA 2012 serves to facilitate regular and timely payment and provide remedies for the recovery of payment in the construction industry.

WHAT IS CIPAA 2012 AND HOW DOES IT AFFECT THE CONSTRUCTION AND DEVELOPMENT INDUSTRY?

The Act introduces statutory adjudication to resolve payment-related construction disputes and to facilitate cash flow problems within the construction industry. Payment default has been a major hurdle in a large number construction projects in Malaysia. It disrupts cash flow and consequently work-progress. This causes delays in projects, or even worse, halt it altogether.

The Act introduced default payment terms for construction contracts, stipulating the value and frequency of progress payments where such terms are provided for under the contract and prohibits the practice of including the ‘pay when paid’ clause. This serves to facilitate regular and timely payments, as well as a binding dispute resolution mechanism and a remedy for payment recovery. Since coming into operation, the Act has gained strength and provided affected parties with a trusted platform to resolve payment disputes under construction contracts for projects carried out in Malaysia.

 WHAT ARE KLRCA’S OBJECTIVES IN THE CONTEXT OF THE CONSTRUCTION INDUSTRY AND ITS ROLE IN IMPLEMENTING CIPAA 2012?

KLRCA is the sole adjudication authority of the CIPAA Act 2012. Since the Act was implemented, the (Malaysian) construction industry has embraced this new adjudication process. The latest total adjudicated amount stands at RM278 million – this shows that the system is working. It remains paramount to KLRCA in ensuring that the construction industry is well equipped with the right knowledge, tools and best practices to effectively navigate through a CIPAA proceeding. The adjudication process can be complex and difficult at times for an uninformed party, especially since there is also a need to address the various practical and administrative issues that arise to ensure clarity and transparency to the stakeholders.

KLRCA plans to implement new measures in the coming years, which would ensure more thorough efficiency in the administration of CIPAA proceedings. We also continually engage in efforts to ensure renewed education, training and knowledge dissemination via a series of events and certification courses to expand the use and understanding of the CIPAA 2012 adjudication process. Recently, we welcomed more than 230 delegates for our annual CIPAA Conference and over 80 participants at our KLRCA Certificate in Adjudication programme.

 

Datuk Professor Sundra Rajoo

HOW HAS THE ACT CONTRIBUTED TO A CHANGE IN THE PAYMENT CULTURE WITHIN THE CONSTRUCTION INDUSTRY?

We notice that parties are now much more aware of the adjudication mechanism, including the enforcement provisions encapsulated under the Act – parties now adhere to the decisions rendered in CIPAA proceedings in respect of making full payment of the adjudicated amount. There is also increased alertness amongst construction stakeholders to adjust to the new strict timelines imposed under the Act for the resolution of such disputes.

WITH THE INCREASE IN CIPAA ADJUDICATION APPLICATIONS, DO YOU FORESEE FURTHER EXPONENTIAL GROWTH OR WILL THERE BE A STABILIZATION AT SOME POINT IN THE NUMBER OF CIPAA APPLICATIONS BEING FILED?

Currently, we are witnessing an exponential growth of CIPAA applications filed at the KLRCA. This was expected when the Act effectively came into force in 2014 as stakeholder awareness on their rights and remedies available under the Act was already at an alltime high. Coupled with the support from the judiciary and efficient administrative mechanism provided for by KLRCA, the rate of CIPAA applications filed at the KLRCA was bound to be high. While we do expect this surge to stabilise in the near future, we still anticipate a steady growth in the number of cases registered on a monthly basis.

THE CIPAA EXEMPTION ORDER FOR GOVERNMENT CONTRACTS WORTH NOT MORE THAN RM20 MILLION BECAME OPERATIVE ON 15TH APRIL, 2014 BUT IT HAD A SUNSET CLAUSE – THE ORDER EXPIRED ON 31ST DECEMBER LAST YEAR. IN YOUR OPINION, HOW BENEFICIAL WOULD THIS LIFTING OF THE EXEMPTION ORDER BE FOR THE RELEVANT INDUSTRIES THAT CIPAA ENCAPSULATES?

The result of the exemption being lifted is that subcontractors handling small jobs involving RM20 million and below (usually Class B contractors, the majority of whom are Bumiputra contractors) will now have greater protection in cases of delayed or non-payment in the context of government contracts. Thus, there is now a level playing field for contracts worth RM20 million and below, where the small contractors who usually need protection are afforded the same level of protection. This is also in line with the overriding objective of the Act as it will, in the long run, ensure a more efficient and professional construction industry with more projects being completed on time (regardless of whether the contracting parties are of government or private entities), thereby allowing savings in cost and eliminating delays.

HOW DOES THE CIPAA 2012 AFFECT PROPERTY INVESTORS AND HOME-BUYERS?

Delayed payments, non-payments and conditional payments as well as ‘pay when paid’ and ‘pay if paid’ practises have constrained the construction industry triggering a domino effect which affects all the players in a construction project. This is compounded by most construction projects usually being stretched over long periods of time and involving a large sum of monetary payment per progress payment. It sometimes leads to insolvencies and a complete standstill in a project. Ultimately, with the enforcement of CIPAA 2012, property investors and home-buyers will have a greater peace of mind knowing that their investment will not suffer.

 

This article was first published in the iProperty.com Malaysia July 2016 Magazine. Get your copy from selected news stands or view the magazine online for free at www.iproperty.com.my/magazine.  Better yet, order a discounted subscription by putting in your details in the form below!

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