On 20 February 2025, the Court of Appeal in the case of SPM Energy Sdn Bhd & Anor v Multi Discovery Sdn Bhd [2025] MLJU 515; [2025] CLJU 410 ruled that Section 35 of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA 2012”) which prohibits the practice of conditional payment terms, applies in court / arbitral proceedings even when no adjudication proceedings under CIPAA 2012 have been instituted. Section 35 of CIPAA 2012 is of general application, and “back-to-back” conditional payment provisions in construction contracts are void and invalid even if adjudication proceedings have not been commenced.
Background Facts & High Court Trial
The Plaintiff company filed the High Court suit against five Defendants. The 1st Defendant company is a subsidiary of the 2nd Defendant company, and the 3rd, 4th and 5th Defendants are directors/shareholders of the 1st and 2nd Defendant.
PRPC Utilities and Facilities Sdn. Bhd. (“Employer”) awarded to the 2nd Defendant a construction project named “Utilities, Interconnecting, Offsite (UIO) Facilities: Construction and Commissioning (CC) of 33 kV and below Distribution Substation Feeder Cable Laying, Jointing and Termination at Gas Insulated (GIS) (Rapid 1200 Project)” in Pengerang, Johor (“Project”). The 2nd Defendant then awarded the Project to the 1st Defendant.
On 12.10.2016, the 1st Defendant appointed the Plaintiff as a sub-contractor of the Project by way of a Letter of Award dated 12.10.2016 (“LA”). Clause 5 of the LA stipulates that the 1st Defendant “will make payment” to the Plaintiff “based on a back to back arrangement after receiving payment” from the Employer. Clause 7 of the LA stipulates that the 1st Defendant “reserves the right to terminate” the LA if the Plaintiff “refuses, fails or neglects to comply with” the LA.
On the same date, the Plaintiff also issued a Letter of Award dated 12.10.2016 appointing Tiemura Engineering Sdn Bhd (“Tiemura”) to perform all of the Plaintiff’s works for the Project. The Plaintiff later assigned its right to payment under the LA to Tiemura.
In February 2018, the Plaintiff proposed a novation of the LA to Tiemura as the Plaintiff claimed that it no longer had the capacity to finance the Project and that the proposed novation will ensure that there will be no more issues on payment to subcontractors and suppliers of the Project.
In April 2018, the 1st Defendant informed the Plaintiff that it had to make direct payments to the Plaintiff’s subcontractors since January 2018 to avoid delays, and claimed that the Plaintiff failed to pay its subcontractors, despite the fact that the 1st Defendant had been paying the Plaintiff for its works. The 1st Defendant also disagreed with the Plaintiff’s proposed novation and rescinded its earlier approval of the assignment of right to payment under the LA.
The Plaintiff responded to the 1st Defendant, stating that the Plaintiff appointed Tiemura as a sub-contractor for the Project. The Plaintiff claimed that it had paid Tiemura and Tiemura’s contractors for the works carried out for the Project, and the Plaintiff did not receive any payment from the 1st Defendant for the works.
The 1st Defendant terminated the Plaintiff’s employment pursuant to Clause 7 of the LA, citing, among others, the delay in the works and that the Plaintiff failed to pay its sub-contractors.
The Plaintiff in the High Court suit claimed for, among others, that the 1st Defendant had breached the LA as follows: –
• The 1st Defendant did not pay directly to the Plaintiff for the works after the Plaintiff’s invoices had been issued to the 1stDefendant;
• The 1stDefendant had delayed in paying the Plaintiff for the works;
• The 1stDefendant had made direct payments to the Plaintiff’s Sub-Contractors for the works; and
• The 1stDefendant’s termination of the LA was unlawful;
After a trial, the High Court Judge allowed the Plaintiff’s claims and ruled that: –
• The 1stand 2nd Defendants did not satisfy the court that there was a delay in the performance of the works by the Plaintiff;
• The 1stDefendant wrongfully terminated the LA because the 1st Defendant could not rely on the allegation that the 1st Defendant had not received payment from the “project owner” as a reason not to pay the Plaintiff for the Works and to terminate the LA;
• The 2ndDefendant is “jointly and severally liable” with the 1st Defendant because the 1st Defendant is “merely a shelf company” for the 2nd Defendant; and
• The Employer had awarded the Project to the 2ndDefendant and the 2nd Defendant then appointed the Plaintiff by using the 1st Defendant as a “front” to issue the LA.
The 1st and 2nd Defendants appealed to the Court of Appeal against the decision of the High Court.
Court of Appeal
The Court of Appeal held that the High Court had committed a plain error of fact and law in arriving at its decision. The Court of Appeal allowed the 1st and 2nd Defendants’ appeal, set aside the High Court’s decision, and directed an assessment in the High Court.
Before the appeal was heard, the Court of Appeal highlighted that the parties did not submit on the validity and application of Clause 5 in the High Court. Hence, the learned High Court Judge did not allude to Clause 5 in the High Court grounds of judgment, let alone decide on its validity and application. The written submissions of the parties in the Court of Appeal also did not refer to the validity and application of Clause 5.
The Court of Appeal explained that Clause 5 is relevant in the appeal as the Plaintiff relied on Clause 5 and demanded payment for the works from the 1st Defendant based on Clause 5. If Clause 5 is valid, upon the 1st Defendant’s receipt of payment from the Employer for the works performed by the Plaintiff’s sub-contractors, the 1st Defendant was bound under Clause 5 to pay to the Plaintiff for the works and if the 1st Defendant failed to do so, the 1st Defendant would have breached Clause 5.
The Court of Appeal posed the following question of law, in relation to Clause 5 of the LA: –
“Whether Clause 5 was valid in court / arbitral proceedings pursuant to Sections 35(1) and (2)(a) CIPAA 2012 when there are no adjudication proceedings”
Section 35 of CIPAA 2012 provides that: –
“1) Any conditional payment provision in a construction contract in relation to payment under the construction contract is void.
2) For the purposes of this section, it is a conditional payment provision when:
a) The obligation of one party to make payment is conditional upon that party having received payment from a third party; or
b) The obligation of one party to make payment is conditional upon the availability of funds or drawdown of financing facilities of that party.”
The Court of Appeal highlighted that there are conflicting High Court decisions on this question of law: –
• In Bond M&E (KL) Sdn Bhd v Isyoda (M) Sdn Bhd [2017] MLJU 376; [2017] CLJU 259, the High Court decided that Section 35 of CIPAA 2012 only applies in adjudication proceedings and does not apply in court proceedings; and
• In the following cases, the High Court decided that Section 35 of CIPAA 2012 is of general application, and even if adjudication proceedings have not been commenced, Section 35 of CIPAA 2012 can invalidate back-to-back conditional payment provisions in construction contracts only (not all contracts) in court proceedings –
a) Khairi Consult Sdn Bhd v GJ Runding Sdn Bhd [2021] MLJU 694; [2021] CLJU 571;
b) MN Global Venture Sdn Bhd v CB Bersatu Sdn Bhd [2022] MLJU 998; [2022] CLJU 959; and
c) Multi Network Sdn Bhd & Anor v Pembinaan Jari Jaya Sdn Bhd [2022] MLJU 3452; [2022] CLJU 3223.
The Court of Appeal decided that subject to two exceptions, it was the intention of the legislature for Section 35 of CIPAA 2012 to apply to “construction contracts” (defined in Section 4 of CIPAA 2012) in court / arbitral proceedings when there are no adjudication proceedings.
The decision of the Court of Appeal is premised on the following reasons in the interpretation of the following provisions in CIPAA 2012: –
1. Section 35 of CIPAA 2012 applies in court / arbitral proceedings when the following 4 cumulative conditions laid down in Section 2 of CIPAA 2012 have been fulfilled cumulatively: –
• there is a “construction contract” as understood in Section 4 of CIPAA 2012;
• the construction contract is made in writing;
• the construction contract relates to “construction work” as defined in Section 4 of CIPAA 2012; AND
• the construction work is carried out wholly or partly within the territory in Malaysia.
2. The following reasons explained by the High Court in MN Global Venture (supra), support the statutory interpretation that the Parliament had intended for Section 35(1) of CIPAA 2012 to apply in court / arbitral Proceedings (when no Adjudication Proceedings have been filed) if the 4 Cumulative Conditions (Section 2 CIPAA) have been satisfied –
• Part II to Part V of CIPAA 2012 concern provisions regarding adjudication proceedings which have been filed under CIPAA 2012. Part II to Part V of CIPAA 2012 contain provisions to attain the purpose to “provide a mechanism for speedy dispute resolution through adjudication”. In contrast, Section 35 is expressly placed by Parliament in Part VI (General) of CIPAA 2012, and is therefore intended by the legislature to be of general application irrespective of whether adjudication proceedings have been instituted pursuant to CIPAA 2012 or not;
• Parliament has expressly or impliedly referred to adjudication proceedings in Sections 8(1), (3), 12(1) to (9), 14, 17(1) to (4), 18(1), (2), 25(a) to (p), 26(1), (2), 27(1) to (3), 32(c), (d) and 37(1) to (3) of CIPAA 2012. If the legislature had intended to confine the application of Section 35 of CIPAA 2012 to adjudication proceedings, Parliament would have easily stated as such in Section 35 of CIPAA 2012;
• There is nothing in Section 35 of CIPAA 2012 which has expressly or by necessary implication, confined the scope of Section 35 to adjudication proceedings. On the contrary, the legislature has employed a wide term “any” in Section 35(1) of CIPAA 2012.
• CIPAA is a specific statute which applies to certain construction contracts. The Contracts Act 1950 (CA), however, is of general application to all contracts. By virtue of the maxim of statutory construction “generalia specialibus non derogant”, the specific provisions in CIPAA shall prevail over the general provisions in CA. The scope of CIPAA 2012, including Section 35 of CIPAA 2012, is therefore not confined by any provision in CA. Nor is there a reason to amend the CA so as to provide for Section 35 of CIPAA 2012 to apply when no adjudication proceedings have been commenced under CIPAA.
3. There are 2 exceptions, even if the 4 cumulative conditions (under Section 2 of CIPAA 2012) have been fulfilled, Section 35 of CIPAA 2012 does not apply in court / arbitral proceedings.
• the existence of circumstances as stipulated in Section 3 of CIPAA 2012 – a construction contract entered into by a natural person for any construction work in respect of any building which is less than four storeys high and which is wholly intended for his occupation; and
• where a person, class of persons, contract, matter or transaction or class of contracts, matters or transactions has been exempted from the application of CIPAA under Section 40 of CIPAA 2012 by the “Minister” (defined in Section 4 of CIPAA 2012).
The Court of Appeal held that Sections 35(1) and (2)(a) of CIPAA 2012 invalidate Clause 5 as: –
1. The 4 cumulative conditions (under Section 2 of CIPAA 2012) had been satisfied with regard to the LA and the works in this case;
2. The 2 exceptions cannot be invoked in respect of the LA; and
3. Clause 5 provided for the 1st Defendant to pay the Plaintiff after the 1st Defendant received payment from the Employer (back-to-back conditional payment provision)
Clause 5 is therefore void and irrelevant for the purpose of the appeal before the Court of Appeal.
Conclusion
The decision of the Court of Appeal clarified and resolved the previously conflicting High Court decisions on the issue of applicability of Section 35 of CIPAA 2012. The law is now clear – a conditional payment clause in a construction contract (which falls within the definition of a “construction contract” under Section 4 of CIPAA 2012) is invalid in court and arbitral proceedings, even when no adjudication proceedings have been commenced under CIPAA 2012.
Conditional Payment Clause in a Construction Contract is Void / Invalid
Introduction
On 20 February 2025, the Court of Appeal in the case of SPM Energy Sdn Bhd & Anor v Multi Discovery Sdn Bhd [2025] MLJU 515; [2025] CLJU 410 ruled that Section 35 of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA 2012”) which prohibits the practice of conditional payment terms, applies in court / arbitral proceedings even when no adjudication proceedings under CIPAA 2012 have been instituted. Section 35 of CIPAA 2012 is of general application, and “back-to-back” conditional payment provisions in construction contracts are void and invalid even if adjudication proceedings have not been commenced.
Background Facts & High Court Trial
The Plaintiff company filed the High Court suit against five Defendants. The 1st Defendant company is a subsidiary of the 2nd Defendant company, and the 3rd, 4th and 5th Defendants are directors/shareholders of the 1st and 2nd Defendant.
PRPC Utilities and Facilities Sdn. Bhd. (“Employer”) awarded to the 2nd Defendant a construction project named “Utilities, Interconnecting, Offsite (UIO) Facilities: Construction and Commissioning (CC) of 33 kV and below Distribution Substation Feeder Cable Laying, Jointing and Termination at Gas Insulated (GIS) (Rapid 1200 Project)” in Pengerang, Johor (“Project”). The 2nd Defendant then awarded the Project to the 1st Defendant.
On 12.10.2016, the 1st Defendant appointed the Plaintiff as a sub-contractor of the Project by way of a Letter of Award dated 12.10.2016 (“LA”). Clause 5 of the LA stipulates that the 1st Defendant “will make payment” to the Plaintiff “based on a back to back arrangement after receiving payment” from the Employer. Clause 7 of the LA stipulates that the 1st Defendant “reserves the right to terminate” the LA if the Plaintiff “refuses, fails or neglects to comply with” the LA.
On the same date, the Plaintiff also issued a Letter of Award dated 12.10.2016 appointing Tiemura Engineering Sdn Bhd (“Tiemura”) to perform all of the Plaintiff’s works for the Project. The Plaintiff later assigned its right to payment under the LA to Tiemura.
In February 2018, the Plaintiff proposed a novation of the LA to Tiemura as the Plaintiff claimed that it no longer had the capacity to finance the Project and that the proposed novation will ensure that there will be no more issues on payment to subcontractors and suppliers of the Project.
In April 2018, the 1st Defendant informed the Plaintiff that it had to make direct payments to the Plaintiff’s subcontractors since January 2018 to avoid delays, and claimed that the Plaintiff failed to pay its subcontractors, despite the fact that the 1st Defendant had been paying the Plaintiff for its works. The 1st Defendant also disagreed with the Plaintiff’s proposed novation and rescinded its earlier approval of the assignment of right to payment under the LA.
The Plaintiff responded to the 1st Defendant, stating that the Plaintiff appointed Tiemura as a sub-contractor for the Project. The Plaintiff claimed that it had paid Tiemura and Tiemura’s contractors for the works carried out for the Project, and the Plaintiff did not receive any payment from the 1st Defendant for the works.
The 1st Defendant terminated the Plaintiff’s employment pursuant to Clause 7 of the LA, citing, among others, the delay in the works and that the Plaintiff failed to pay its sub-contractors.
The Plaintiff in the High Court suit claimed for, among others, that the 1st Defendant had breached the LA as follows: –
After a trial, the High Court Judge allowed the Plaintiff’s claims and ruled that: –
The 1st and 2nd Defendants appealed to the Court of Appeal against the decision of the High Court.
Court of Appeal
The Court of Appeal held that the High Court had committed a plain error of fact and law in arriving at its decision. The Court of Appeal allowed the 1st and 2nd Defendants’ appeal, set aside the High Court’s decision, and directed an assessment in the High Court.
Before the appeal was heard, the Court of Appeal highlighted that the parties did not submit on the validity and application of Clause 5 in the High Court. Hence, the learned High Court Judge did not allude to Clause 5 in the High Court grounds of judgment, let alone decide on its validity and application. The written submissions of the parties in the Court of Appeal also did not refer to the validity and application of Clause 5.
The Court of Appeal explained that Clause 5 is relevant in the appeal as the Plaintiff relied on Clause 5 and demanded payment for the works from the 1st Defendant based on Clause 5. If Clause 5 is valid, upon the 1st Defendant’s receipt of payment from the Employer for the works performed by the Plaintiff’s sub-contractors, the 1st Defendant was bound under Clause 5 to pay to the Plaintiff for the works and if the 1st Defendant failed to do so, the 1st Defendant would have breached Clause 5.
The Court of Appeal posed the following question of law, in relation to Clause 5 of the LA: –
“Whether Clause 5 was valid in court / arbitral proceedings pursuant to Sections 35(1) and (2)(a) CIPAA 2012 when there are no adjudication proceedings”
Section 35 of CIPAA 2012 provides that: –
“1) Any conditional payment provision in a construction contract in relation to payment under the construction contract is void.
2) For the purposes of this section, it is a conditional payment provision when:
The Court of Appeal highlighted that there are conflicting High Court decisions on this question of law: –
The Court of Appeal decided that subject to two exceptions, it was the intention of the legislature for Section 35 of CIPAA 2012 to apply to “construction contracts” (defined in Section 4 of CIPAA 2012) in court / arbitral proceedings when there are no adjudication proceedings.
The decision of the Court of Appeal is premised on the following reasons in the interpretation of the following provisions in CIPAA 2012: –
1. Section 35 of CIPAA 2012 applies in court / arbitral proceedings when the following 4 cumulative conditions laid down in Section 2 of CIPAA 2012 have been fulfilled cumulatively: –
2. The following reasons explained by the High Court in MN Global Venture (supra), support the statutory interpretation that the Parliament had intended for Section 35(1) of CIPAA 2012 to apply in court / arbitral Proceedings (when no Adjudication Proceedings have been filed) if the 4 Cumulative Conditions (Section 2 CIPAA) have been satisfied –
3. There are 2 exceptions, even if the 4 cumulative conditions (under Section 2 of CIPAA 2012) have been fulfilled, Section 35 of CIPAA 2012 does not apply in court / arbitral proceedings.
The Court of Appeal held that Sections 35(1) and (2)(a) of CIPAA 2012 invalidate Clause 5 as: –
1. The 4 cumulative conditions (under Section 2 of CIPAA 2012) had been satisfied with regard to the LA and the works in this case;
2. The 2 exceptions cannot be invoked in respect of the LA; and
3. Clause 5 provided for the 1st Defendant to pay the Plaintiff after the 1st Defendant received payment from the Employer (back-to-back conditional payment provision)
Clause 5 is therefore void and irrelevant for the purpose of the appeal before the Court of Appeal.
Conclusion
The decision of the Court of Appeal clarified and resolved the previously conflicting High Court decisions on the issue of applicability of Section 35 of CIPAA 2012. The law is now clear – a conditional payment clause in a construction contract (which falls within the definition of a “construction contract” under Section 4 of CIPAA 2012) is invalid in court and arbitral proceedings, even when no adjudication proceedings have been commenced under CIPAA 2012.
About the author
Ankit R Sanghvi
Partner
Dispute Resolution
Halim Hong & Quek
[email protected]
Chew Jin Heng
Senior Associate
Dispute Resolution
Halim Hong & Quek
[email protected]
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