Issues On Sub-Contract's Direct Payment - 221219 - 123348
Issues On Sub-Contract's Direct Payment - 221219 - 123348
Issues On Sub-Contract's Direct Payment - 221219 - 123348
26 August 2011
Online at https://mpra.ub.uni-muenchen.de/34023/
MPRA Paper No. 34023, posted 10 Oct 2011 10:50 UTC
SECURITY OF PAYMENT IN MALAYSIAN CONSTRUCTION
INDUSTRY: ISSUES ON SUB-CONTRACT’S DIRECT PAYMENT
ABSTRACT
In Malaysia, sub-contractors have to bear with the current structure of payment
mechanisms in the standard forms of contract, which are payment upon
certification, direct payment from the employer, and contingent or conditional
payment. However, „direct payment‟ provision is applied for in most of the
nominated sub-contracts and not to the domestic sub-contractors; thus the
Construction Industry Payment and Adjudication (CIPA) Act is proposed. This
paper, though, is to disclose the findings on legal cases and sub-contractors‟
perspective on direct payment, by preliminary analyzing the quantitative
questionnaire survey to the first 81 from the identified 1,500 sub-contractors
throughout the country. Before that, from 186 cases, only 5 selected cases are
analysed that thoroughly addressed the judgment of direct payment. It is found
out that the particularly small sized subcontractors are definitely need to enhance
their knowledge of the so-called the „Security of Payment‟ Regime to benefits
from the proposed Act.
KEY WORDS
Malaysia, Legal readiness, Sub-contractors, Security of payment, Construction
industry
1 INTRODUCTION
In a typical engineering and construction contract, it is apparent that the
contractor‟s consideration vis-à-vis the contract entered into by the parties is the
carrying out of the works under the contract, e.g. construction, installation,
material supply, etc. This represents his part of the bargain or the promise made.
In reciprocation, the employer must keep his side of the bargain by furnishing
the necessary consideration which in most cases comes in a monetary form [8].
Payment has been said to be the life-blood of the construction industry. Yet
the industry knows payment default, specially delayed and non-payment, remain
a major problem [2]. The success of a construction project requires the timely
flow of money from the owner to the contractor down to the subcontractors, sub-
subcontractors, suppliers, and vendors [5].
Contractors often attempt to shift the risk of the owner‟s non-payment to
subcontractors by including contingent payment provisions – such as pay-when-
paid or pay-if-paid clauses – in the subcontract [5].
2. LITERATURE REVIEW
Principles Methods of Paying Sub-contractor: Supardi, Adnan and
Mohammad [10] conclude that in the standard forms of construction contracts,
currently, the payment structure to the sub-contractors are divided into three:
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payment upon certification, direct payment from the employer, and contingent
payment or conditional payment.
Payment upon Certification: The conditions precedent for the sub-
contractor's entitlement to payment is the receipt of the interim payment
certificate by the main contractor and the lapse of the defined 'window-period'
for payment thereafter. It is immaterial that the main contractor not having
received the said amount from the employer or his honouring period being
longer than the grace period being given to him to reimburse the sub-contractor.
Once he receives the relevant certificate, the clock starts ticking against him in
regard to his obligation to pay [7].
Direct Payment from the Employer: Under this payment regime, although
the payments due to the sub-contractor are included in the Interim and/or Final
Certificates to the main contractor, such payments are not paid, as in the
traditional method, through the latter but directly to the sub-contractor
concerned by the employer. Only the relevant profit and attendance for the said
sub-contractor is disbursed to the main contractor [7].
Contingent Payment or Conditional Payment: A third common scheme for
paying sub-contractors is the method going under the umbrella description of
„contingent payment‟. In actual fact, this regime encompasses a number of labels
including, inter alia, the following, i.e. „pay if paid‟ clauses. „pay when paid‟
clauses, and „back-to-back‟ clauses [7].
Avenues to Improve Payment Problem: There are various avenues that
are available to improve the payment problem in the construction industry and
some of these options have been incorporated in the construction contract or
statutes in the other developed countries. We should choose and adopt the best
solutions which best suits and serves the Malaysian construction industry [6]. In
summary, these avenues include:
Suspension of work or going slow: Clause 30.7 of the Agreement and
Conditions of PAM Contract 2006 (With Quantities) and Clause 42.10 of the
CIDB Standard Form of Contract for Building Works 2000 Edition provide for
suspension of work. There are no general common law right of suspension of
work [2][3][4] for non-payment.
Eradication of “pay when paid”: The standard forms of construction
contract do not provide for such a remedy other than the CIDB Standard Form
of Contract for Building Works 2000 Edition under Option Module C Clause
C3.(c). The right of suspension is quite useless if the sub contract is subjected to
a “”pay when paid” condition which is rather common unless of course the
contractor has absconded with money paid by the employer [4].
Adjudication: Adjudication is provided in the Agreement and Conditions of
PAM Contract 2006 (With Quantities) under Clause 34.0. The adjudication
process in the United Kingdom does not also make the claimant a secured
creditor after a decision is obtained. The successful claimant must still apply to
the court for summary judgment and thereafter execute the judgment in the usual
ways [4].
Liens: No construction contract elsewhere provide clause on lien, but the
United States of America and Canada addressed it by way of mechanic lien
statutes that is absent in Malaysia. Any attempt to provide security for payment
to a contractor, subcontractor or supplier through a lien [4] or charging order
scheme might not be in the best public interest and of many of the parties –
particularly the purchasers [2].
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Trust: The trust concept is not alien in Malaysia in respect of retention of
monies. It is provided in Clause 30(6)(a) of the Agreement and Conditions of
PAM Contract 2006 (With Quantities) and Clause 42.3(c)(i) of the CIDB
Standard Form of Contract for Building Works 2000 Edition. The trust is
however a conditional one in that it permits the employer or the contractor to set
off permissible deductions there from [4].
Payment bonds: Clause 42.1(e) of the CIDB Standard Form of Contract for
Building Works 2000 Edition provide for payment bond. It is undisputable that
the payment bond is one of the best remedies available to contractors. However,
the contractors have to provide payment bonds to their subcontractors and
suppliers in addition to the performance bond to the developer. This double bond
provision will inevitably reduce the contractor‟s financial liquidity and result in
the much needed cash flow for the project channeled to the bank for securing the
bonds [3]. Supardi, Yaakob & Adnan [12] states that after discussing on the
interpretation on application of injunction relief in performance bond, as in
payment bonds, it is noticed that very careful choice of words should be adopted
by the constructor of a performance bond so that a clear understanding of its
conditionality can be achieved and undisputable. Therefore, Supardi, Adnan, &
Yaakob [11] further stated that to be an undisputed meaning of the words in the
performance bond, as in payment bonds, the performance bond itself should be
either purely conditional or purely unconditional 'on-demand' bond.
Direct payment from principal: Direct Payment is provided in the P.W.D.
Form 203A (Rev. 2007) Standard Form of Contract to be Used Where Bills of
Quantities Form Part of the Contract under Clause 60.1. All subcontractors and
suppliers will have similar access to direct payments, which is discretionary and
not statutory [3].
Contractor’s project account: There have also been other „creative‟
suggestions e.g. REHDA on the possibility of creating a „contractor‟s project
account‟. But this has yet to be explored in detail [2].
REFERENCES
[1] ABDULLAH, F. Construction industry and economic development: The Malaysian scene [B],
2004, Johor: Universiti Teknologi Malaysia.
[2] AMEER-ALI, N. A. N. (2006). A “Construction Industry Payment and Adjudication Act”:
Reducing payment-default and increasing dispute resolution efficiency in construction. Masters
Builders [J], 2006.3, PP:4-14.
[3] ANONYMOUS. A contractor‟s point of view on security of payment. Masters Builders [J],
2006.3, PP:16-17.
[4] FONG, L. C. The Malaysian construction industry – The present dilemmas of unpaid
contractors. Masters Builders [J], 2005.4, PP:80-82.
[5] MAY, A.L.; SIDDIQI, K. Contingent-payment provision puzzle – Safeguarding against and
unintended outcome. Journal of Architectural Engineering [J], 2006.12, PP:158-162.
[6] SIN, T. A. S. Payment issues – The present dilemmas of Malaysian construction industry.
Masters dissertation [D], 2006, Retrieved from Universiti Teknologi Malaysia Institutional
Repository.
[7] SINGH, H. Construction of contingent payment clauses: Is there light at the end of the tunnel?.
Malayan Law Journal Articles [J], 2006.3.
[8] SINGH, H. Engineering and construction contracts management – Post-commencement
practice [B], 2003, Kuala Lumpur: LexisNexis.
[9] SUPARDI, A.; ADNAN, H.; MOHAMMAD, M.F. Security of Payment Regime in
Construction Industry: Are Malaysian Sub-Contractors Ready?. The Built & Human
Environment Review [J], 2011. 4 (1), PP:122-137.
[10] SUPARDI, A.; ADNAN, H.; MOHAMMAD, M.F. Sub-Contractors‟ Readiness on the
Malaysian Security of Payment Legislation in Construction Industry. International Conference
on Construction and Project Management [C], 2010, Chengdu: IEEE, PP:248-252.
[11] SUPARDI, A.; ADNAN, H.; YAAKOB, J. Legal Analysis on Malaysian Construction
Contract: Conditional versus Unconditional Performance Bond. Journal of Politics and Law [J],
2009.2(3), PP:25-34.
[12] SUPARDI, A.; YAAKOB, J.; ADNAN, H. (2009). Performance Bond: Conditional or
Unconditional. 2nd Construction Industry Research Achievement International Conference [C],
2009, Kuala Lumpur: CREAM.
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