Void? The Conditional Payment Conundrum

The Construction Industry Payment and Adjudication Act (“the Act”) was created to provide an alternative method for a party to recover the unpaid sum that is due to them in a construction contract. More specifically, it was created to remedy the ‘pay-when-paid’ situation in the construction industry. In the construction industry, this is known as the “conditional payment clause”. However, is such a clause valid in the eyes of the law? We will briefly deal with this issue in this article. 

What is a conditional payment?

Section 35 of the Act lays down two instances in which the method of paying the other party in a construction contract is considered a conditional payment, namely:

1. When the obligation of one party to make payment to the other party is conditional upon that party having received payment from a third party; or
2. When the obligation of one party to make payment is conditional upon the availability of funds or drawdown of financing facilities of that party.

Is conditional payment restricted to the above 2 instances?

No. This was affirmed in Econpile (M) Sdn Bhd v IRDK Ventures Sdn Bhd and Anor, where the court held that the wording of section 35 of the Act allows the court to a wider interpretation to the section. 

By allowing for a wide interpretation of section 35, it has allowed the court to determine on a case to case basis as to whether a term in a construction contract is a conditional payment clause to ensure that an unpaid party can claim for payment for work done or services rendered in a more speedy manner in a construction contract dispute. 

Is a conditional payment clause void?

It was common to have a conditional payment clause in a construction contract. The whole ‘pay-when-paid’ clause allowed the main contractor to pay the subcontractor only upon the main contractor having received payment from a third party or when the main contractor has funds or drawdown of financing facilities. 

When the Act came into force, any conditional payment provision in relation to payment under a construction contract is void. However, it was held in Bond M & E (KL) Sdn Bhd v Isyoda (M) Sdn Bhd that the conditional payment provision is only void if there is a dispute between the parties and the matter is brought for adjudication under the Act.

This was resolved once and for all in Jack-In Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd. In Jack-In Pile, the Federal Court held that ALL forms of conditional payment clause are prohibited in a construction contract.

However, it must be noted that this prohibition only applies to a construction contract that was penned down after the Act came into force on 15.04.2014. Any construction contract with a conditional payment clause that was entered before the date stipulated above is still valid and enforceable by the parties in the construction contract. 

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