Federal Court finds ruling on unpleaded issue fatal to adjudication decision

1 October 2024

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The Federal Court in Anas Construction Sdn Bhd v JKP Sdn Bhd & Another Appeal [2024] CLJU 63 has affirmed the Court of Appeal’s decision that an adjudicator’s jurisdiction is limited to matters referred to the adjudicator pursuant to section 5 of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”).  

This article explores the basis on which the Federal Court reached its majority decision and the practical implications for adjudicators and adjudicating parties.

Please also refer to our article on this case titled “Court of Appeal rules adjudicator acted in excess of jurisdiction and in breach of natural justice by ruling on unpleaded issue”.

Snapshot

Anas Construction Sdn Bhd (“Appellant”) was appointed by JKP Sdn Bhd (“Respondent”) as the main contractor for the construction and completion of a project in Pulau Pinang. A construction contract was entered into between the parties (“Contract”) using the Public Works Department (“PWD”) standard form of contract (PWD Form 203A (Rev 1/2010)).

Over the course of the project, the Appellant had engaged independent professional consultants to prepare a report regarding cracked beams and a safety report. The dispute arose when the Respondent allegedly failed, neglected, or refused to pay the professional fees and charges due to the consultants.

The Appellant commenced adjudication proceedings in respect of the unpaid professional fees and charges payable to the consultants.

The Appellant made reference to clauses 28, 55, and 56 of the Contract before the adjudicator as well as in court proceedings to establish its cause of action against the Respondent. These clauses of the PWD form of contract are in relation to “payment to contractor and interim certificates”, “event and consequences of default by the government”, and “certificate of termination costs” respectively.

The Respondent had instead referred to Clause 36.5 of the Contract, which it asserted was the proper clause. Clause 36.5 provides that “any cost of testing should be borne by the contractor if such a test is proposed by the contract or clearly intended by or provided for in the contract.” This clause was not relied upon by the Appellant.

At the end of the adjudication, the adjudicator allowed the Appellant’s claim (“Decision”). In the Decision, the adjudicator relied on Clause 36.6 of the Contract. Clause 36.6 provides that, “notwithstanding anything in clause 36.5, if the contractor carries out any further test as required by the [Supervising Officer] pursuant to clause 36.2 and the result of such test shows the workmanship or materials is not in accordance with the provisions of the Contract, then the cost of such test shall be borne by the Contractor. But if the result of such test shows the workmanship or materials comply with the provisions of the Contract, that the cost of such test shall be borne by the Government.” (“Clause 36.6”).

It is important to note that Clause 36.6 of the Contract was later found to be neither pleaded by the Appellant nor the Respondent in the relevant cause papers.

Before the High Court, the application to enforce the Decision was allowed on the basis that the adjudicator did not act beyond his jurisdiction and had acted fairly and independently. With respect to the issues in dispute, the High Court found that it was sufficient that the whole construction contract was pleaded. Further, the High Court also found that there was no breach of natural justice and, in any case, the Respondent had failed to show how the adjudicator had acted unfairly and had not adduced evidence of substantial prejudice to the Respondent.

At the Court of Appeal, the decisions of the High Court were reversed on the ground that the adjudicator had acted in excess of his jurisdiction, as it was found that Clause 36.6 was not relied upon by the Appellant to support its cause of action in the payment claim. It was further found that the failure of the adjudicator to invite parties to submit on Clause 36.6 (should he have found it to be relevant) amounted to a denial of natural justice.

Judgment

The Federal Court, by way of a majority decision, dismissed the Appellant’s appeal.

Whether the adjudicator acted in excess of jurisdiction

The majority of the Federal Court held that section 27(1) of the CIPAA should be given its literal and ordinary meaning, that is, the jurisdiction of an adjudicator is expressly limited to matters referred by parties in a payment claim (section 5 of the CIPAA) and a payment response (section 6 of the CIPAA). An adjudication beyond the matters referred to requires written consent from the parties as stated in section 27(2) of the CIPAA.

The decision of the adjudicator was founded on Clause 36.6 (which was not expressly referred to in either the payment claim or the payment response), and therefore exceeded his jurisdiction. Further, the parties had not provided written consent to extend the adjudicator’s jurisdiction to matters beyond that pleaded in the payment claim and payment response, as Clause 36.6 was not brought to the attention of the parties for consent to be provided. On the grounds that the adjudicator had acted in excess of his jurisdiction, the Decision was liable to be set aside pursuant to section 15(d) of the CIPAA.

Whether there was denial of natural justice

The majority of the Federal Court found that the adjudicator’s failure to allow the parties the opportunity to submit or canvass the issue of cause of action under Clause 36.6 of the Contract, before making the decision, amounted to a denial of natural justice.

Dissenting judgment

Mary Lim FCJ’s dissenting judgment will be of interest to parties and to practitioners alike as it highlights the approach that the courts must favour in interpreting the CIPAA which should promote its purpose. We summarise below the main points with paragraph references to enable further inquiry.

The questions posed to the Federal Court were all answered in the negative by Mary Lim FCJ:

1. First, on the strict rules of pleadings as applicable in civil claims and whether they are applicable to adjudicating proceedings under the CIPAA.
2. Secondly, whether the dicta in View Esteem Sdn Bhd v Bina Puri Holdings Bhd [2018] 2 MLJ 22 (“View Esteem”) prohibits an adjudicator from referring to a specific clause in a construction contract when allowing the claim when the said clause was not specifically stated in the payment claim and adjudicating claim by the claiming party?
3. Finally, in a CIPAA award, whether the adjudicator's consideration of a specific clause in the construction contract amounted to a breach of natural justice or an act in excess of its jurisdiction if the clause is not specifically stated in the payment claim or adjudication claim, and if parties are not invited to further submit on the said clause.

Mary Lim FCJ pointed out the following, among other things:

• The provisions under the CIPAA with the Rules of Court were compared, and it was found that the strict rules of pleadings would not apply in adjudication proceedings under the CIPAA (see paragraphs 90 to 100);
• The dicta in View Esteem was mis-appreciated by the Court of Appeal, as the case held that the limiting factor to the adjudicator’s jurisdiction is the subject of the claim. In the present case, the subject of the claim and the cause of action had always been on the claim for professional fees. As the adjudicator had only adjudicated on this, the decision is not liable to be set aside (see paragraphs 149 to 154);
• The details set out in respect of cause of action should be sufficient for a respondent to respond to the claim and that this was adequate (see paragraph 117);
• A proper examination of the payment claim and adjudication claim would have found that Clause 36.6 was already cited (see paragraph 121); and
• In any event, the entire construction contract was before the adjudicator, where it would be unreasonable to require or insist that the adjudicator wears blinkered lenses in construing Clause 36.5 (which was referred to by the Respondent) and to ignore the rest of Clause 36 (see paragraph 137).

On the above premises, Mary Lim FCJ opined that the adjudicator had not exceeded his jurisdiction and that there was no breach of natural justice.

Comment

The decision of the Federal Court solidifies the importance of being clear as to the cause of action for any claims made under the CIPAA. The cause of action must be “pleaded” clearly in any payment claim to allow the adjudicator to be properly clothed with jurisdiction. Without such express consent, the adjudication may be liable to be set aside for excess of jurisdiction.

In the event the parties had missed out on such “pleadings”, if the adjudicator comes across any relevant matters in considering the claims which are not part of the “pleaded” case, the parties should be requested to consider whether to extend the adjudicator’s jurisdiction to include the same.

This is to avoid any subsequent assertions that the parties’ right to be heard has been vitiated and that the adjudication decision should be set aside for breach of natural justice.

Further information

This article has been prepared with the assistance of Principal Abd Azim Abd Razak.