Do Adjudicators Have the Jurisdiction to Determine Counterclaims?

by Shannon Rajan on 15 April 2015

Some commentators are of the view that CIPAA 2012 does not provide for the non-paying party to raise a counterclaim, which should properly be brought in arbitration proceedings. This view has been adopted in the West Australian case of Alliance Contracting Pty Ltd v James (“Alliance”) and the Singaporean case of Quanta Industries Pte Ltd v Strategic Construction Pte Ltd (“Quanta”), in which both courts held that the Adjudicator does not have the jurisdiction to award a positive monetary payment to the non-paying party in an adjudication.

This article analyses the CIPAA 2012 framework and the cases from other jurisdictions to determine whether the Adjudicator ought to have jurisdiction to determine a non-paying party’s counterclaim in Malaysia.

Section 6 does not limit the non-paying party’s right to raise a counterclaim which exceeds the unpaid party’s claim. Section 6(2) contemplates the non-paying party disputing the whole amount of the payment claim. The reason for disputing the whole claimed amount can be because the non-paying party has a counterclaim, which exceeds the unpaid party’s claim. There is also no express provision under the CIPAA 2012, which restricts or disallows the Adjudicator to award an amount in favour of the non-paying party.

Section 7(1) allows either the unpaid party or the non-paying party to commence adjudication proceedings by filing a notice of adjudication after the expiry of the period to file a payment response. This means that CIPAA 2012 was not intended to restrict the right of a non-paying party to raise a legitimate counterclaim for which the non-paying party has an interest in pursuing by initiating adjudication under CIPAA 2012.

Section 27(1) provides that the “adjudicator’s jurisdiction in relation to any dispute is limited to the matter referred to adjudication by the parties pursuant to sections 5 and 6”. Again, the wording in Section 27(1) merely limits the Adjudicator’s jurisdiction to the matters raised in the payment claim and payment response – it does not put a restriction on the right of the non-paying party to raise a counterclaim in the payment response.

The enforcement provision in Section 28 is not restricted to the Claimant in adjudication. The opening words in the Section 28(1), which state “A party” allows either the unpaid party or the non-paying party to enforce an adjudication decision made in its favour.

The CIPAA framework clearly does not expressly or impliedly prohibit the non-paying party from raising a counterclaim and further allows the Adjudicator to award a positive monetary payment in favour of the non-paying party.

The cases of Alliance and Quanta are both distinguishable and ought not to be applied to CIPAA 2012. Unlike the statutory adjudication regimes in Western Australia and Singapore where there is express restriction or limitation in their legislations on the power of the adjudicator to allow the non-paying party a positive payment in adjudication, there is no such restriction in CIPAA 2012.

Quanta Industries Pte Ltd v Strategic Construction Pte Ltd

The decision in Quanta should not be applied to CIPAA 2012 as this Singapore High Court decision is based primarily on the provision in Section 17(2) of the Building and Construction Industry Security of Payment Act 2006 (“SOPA”), which only allows the adjudicator to either dismiss a claim or award a sum in favour of the claimant in an adjudication determination. Section 17(2) of SOPA provides:

“(2) An adjudicator shall, in relation to an adjudication application, determine –

(a) the adjudicated amount (if any) to be paid by the respondent to the claimant …”

There is no equivalent provision as Section 17(2) of SOPA in CIPAA 2012. Our Section 12(5) provides that “the adjudication decision shall also determine the adjudicated amount and the time and manner the adjudicated amount is payable”. It does not limit the jurisdiction of the adjudicator to only determine the adjudicated amount to be paid by the respondent to the claimant.

Further, under SOPA, “claimant” refers to a person who is entitled to a progress payment under Section 5 of SOPA. Section 5 of SOPA provides that “any person who has carried out any construction work or supplied any goods and services, under a contract is entitled to a progress payment.” As such, under the Singapore regime, the claimant must only be the person who is entitled to a progress payment under a construction contract, namely, parties like contractors and suppliers in a construction contract. Further, Section 2 of SOPA defines “respondent” as “a person who is or may be liable to make a progress payment under the contract to a claimant”. When these provisions are read with Section 17(2) of SOPA, it is clear that the Singapore Parliament had only intended the adjudicator to determine whether or not there is an adjudicated amount to be paid by the respondent to the claimant, and not vice versa. This must be contrasted with CIPAA 2012 whereby Section 7(1) expressly allows the unpaid party or the non-paying party to be the claimant in adjudication, provided that Sections 5 and 6 have been complied with.

Alliance Contracting Pty Ltd v James

The decision in Alliance was also based primarily on a specific provision in the Western Australian statutory regime, namely Section 31(2)(b) of the Construction Contracts Act 2004, which provides, inter alia, that the adjudicator may “determine on the balance of probabilities whether any party to the payment dispute is liable to make a payment…”. The Western Australia Supreme Court Judge held that the determination by an adjudicator under the Act was limited to determining the recipient of the payment claim is able to make a payment in respect of that payment claim. The provisions in CIPAA 2012 are different from that in the Western Australian legislation. The payment dispute under the Western Australia Construction Contracts Act 2004 refers to a dispute arising from a “payment claim”. Under Section 3 of the Construction Contracts Act 2004, “payment claim” can either be a claim by the contractor to the principal or, by the principal to the contractor. It is because of this specific distinction made for the two types of “payment claim(s)” in the Construction Contracts Act 2004 that the learned Judge in Alliance held that a counterclaim could not be subsumed into the payment dispute arising from the contractor’s payment claim, but rather the counterclaim by the employer itself was to be treated as a subject of a separate payment claim. There is no such distinction or limitation provided in CIPAA 2012.

Instead, the English case of Work Space Management Limited v YJ London Limited (“Workspace Management”) may be more relevant in the Malaysian context. In Workspace Management, Coulson J referred to the case of Federal Commerce & Navigation Co. Ltd v Molena Alpha, where Lord Denning made it clear that, where cross-claims are closely connected, it can be manifestly unfair not to take such cross-claims into account when reaching a decision:

“…cross-claims which go directly to impeach the plaintiff’s demands, that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim.”

Whilst it is not disputed that the object and intent of CIPAA 2012 is “to alleviate payment problems” in the construction industry, in the absence of any clear express provision in the CIPAA 2012, this proposition cannot be taken to the extreme to the extent that the Parliament also intended that the ordinarily entrenched legal right of a respondent to raise a counterclaim be denied. The unpaid party has to accept the consequences of its own reference. It cannot be the situation where it is a “zero sum game” for contractor. Otherwise, it would lead to potential risk of abuse or floodgates of adjudication claims being brought by irresponsible contractors who want to try their luck in getting more monies from the employers through the process of adjudication, which is much less costly and burdensome than resolving disputes finally by arbitration.