The Subcontractor’s Exemption Dilemma

In a construction dispute that comes within the ambit of the Construction Industry Payment and Adjudication Act (“CIPAA”), can a subcontractors’ contract can be considered an exempt contract under the First Schedule of the Construction Industry Payment And Adjudication (Exemption) Order? To know more, let us dive into the recent case of  ENRA Engineering And Fabrication Sdn Bhd v. Gemula Sdn Bhd & Another Case and take a look at what does the court has to say about this issue.

Brief facts

Germula entered into a contract with Jabatan Kerja Raya Pahang (“JKR”) for a construction project at 10 mile Camp in Kuantan, Pahang. More specifically, it was for the construction of a vehicle garage and it’s infrastructure within the 10 mile Camp. Germula then appointed ENRA Engineering as the subcontractor to supply steel structure, building materials and to complete all repair works for the project for a sum of slightly below RM17 million. As the project progressed, disputes arose between the Germula and ENRA Engineering with respect to the payment for works done by ENRA Engineering. ENRA Engineering then issued a payment claim for a sum of slightly above RM10 million (RM10,222,683.87 to be exact) to Germula. Germula responded by serving a payment response on ENRA Engineering and appointed an adjudicator under CIPAA to adjudicate the matter. 

The adjudicator however found in favor of ENRA Engineering’s claim and ordered Germula to pay the sum mentioned above, the interest rate, adjudication cost and the legal cost incurred to ENRA Engineering. ENRA Engineering subsequently filed an originating summons in court to enforce the adjudication decision while Germula filed an originating summons to set aside the same decision.  

Germula’s contention

Germula contended that the adjudicator does not have the power to adjudicate the payment claim as the contract is a government contract and is not covered or comes under the ambit of CIPAA as envisaged by the Exemption Order.

**CIPAA was created to “facilitate regular and timely payment, to provide a mechanism for speedy dispute resolution through adjudication, to provide remedies for the recovery of payment in the construction industry and to provide for connected and incidental matters”. It is basically a summary remedy for the recovery of payment under the construction industry. However, as mentioned above, not all construction contracts are covered by CIPAA. 

The court’s reasoning and decision

The court dismissed Germula’s application and allowed ENRA Engineering to enforce the adjudicator’s decision.

In coming to its decision, the court agrees with Germula that this contract is indeed a government contract. Assuming that this is a government contract (the contract between JKR and Germula) that falls within the ambits of the Exemption Order, then the contracts down the chain i.e. Germula’s contract with ENRA Engineering will automatically be exempted from the grasp of CIPAA as well. The court noted that it does not make sense and it is not fair for the main contractor (in this case, Germula’s) if the main contractor could not pursue a course of action through CIPAA against the employer (in this case, JKR) and yet has to submit to adjudication claim brought by its subcontractor (in this case, ENRA Engineering). As the court puts it, it would have caused undue hardship to the main contractor as they have to pay their subcontractors even though they have not been paid by their employer. 

However, the court also pointed out that not all government contract falls within Exemption Order. In order for a government contract to fall within the Exemption Order, it must fulfill the requirements under the First of the Exemption Order. In this case, the contract must fall within section (a) of the First Schedule of the Exemption Order, whereby the construction work must “relate to national security or security-related facilities which includes the construction of military and police facilities, military bases and camps, prison and detention camps, power plant and water treatment plant”.  In this case, the court held that while the subcontractors were constructing a military facility in 10 miles Camp, it was not enough to bring the contract under the coverage of the Exemption Order as ENRA Engineering was not constructing a construction related to national security or security-related facilities- the garage was nothing more than a place to store and park motor vehicles. 

Conclusion

In conclusion, a subcontractor can be exempted from coming under CIPAA by virtue of the Exemption Order provided that: 

1. The main contractor’s contract with the employer is a government contract in nature (and which exempts the main contractor from coming under CIPAA as well); and 
2. The government contract falls within the definition set out in the First Schedule of the Exemption Order.

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