This seminar was part of the Bar Council practical construction law series presented by the Construction Law Committee to practitioners. It covers the topic of payments and common issues arising in the construction industry.

1. Practical Construction
Law for Practitioners
- Payments
Chan Kheng Hoe

2. Topics Covered
● Must retention sum be in separate account?
● Can sub-contract provide for back-to-back
payments?
● Can contractor suspend, go slow or
terminate due to non-payment?
● Difference between interim, penultimate and
final certs?
● Can certificates be revised?

3. Retention Monies- must it be
in a separate account? (1)
For discussion
Why is this question important?

4. Retention Monies- must it be
in a separate account? (2)
Why is this question important?
● Most contracts provide for retention
sum (usually 5%)
● Usually released in 2 moiety
○ 1st moiety upon CPC
○ 2nd moiety upon CMGD
● If not set aside in separate account:
○ Employer may utilise monies for its
own purposes
○ Monies at risk if employer enters into
liquidation before full release
○ Employer may be indebted to other
creditors whose claim may affect the
monies held

5. Retention Monies- must it be
in a separate account? (3)
Contractually:
● PAM
○ Employer has fiduciary duty as trustee of
money to Contractor
○ Contractor’s beneficial interest subject to
deductions certified by Architect
○ Contractor can demand for monies to be
held in trust account at its cost
● CIDB
● JKR
○ No retention sum - use of performance bond
instead
For discussion:
● Even though PAM provides for contractors
to demand for monies to be held in trust
account, it is extremely rare for contractors
to do so. Why do you think that is so?

6. Retention Monies- must it be
in a separate account? (4)
Case Law: Qimonda Malaysia Sdn Bhd (in
liquidation) v Sediabena Sdn Bhd & Anor
[2012] 3 MLJ 422, CA
Facts:
● Employer voluntarily wound up
● Did not release in excess of RM6m of
retention sum to contractor & sub-con
● Contractor sought declaration retention
monies were held in trust
Employer’s Arguments:
● Contract does not provide for a trust
● Retention sum not set aside in separate
account (no request by Contractor either)
● Contractor filed proof of debt as creditor-
claim as trust money would be preferential
treatment of Contractor as a creditor
● So, how would you argue against the
Employer in this case?

7. Retention Monies- must it be
in a separate account? (5)
Case Law: Qimonda Malaysia Sdn Bhd (in
liquidation) v Sediabena Sdn Bhd & Anor
[2012] 3 MLJ 422, CA
Contractor’s Arguments:
● Retention monies, by nature, are trust
monies
● Express clause not a precondition of trust-
can be by operation of law
● Employer is fiduciary to the trust
● No issue of preferential treatment because
retention monies do not belong to Employer
in the first place
● Filing of proof of debt as an estoppel is an
afterthought and non-issue, and is without
prejudice to Contractor’s claim for retention
sum as trust money
So, how would you decide if you were the
panel?

8. Retention Monies- must it be
in a separate account? (6)
Case Law: Qimonda Malaysia Sdn Bhd (in
liquidation) v Sediabena Sdn Bhd & Anor
[2012] 3 MLJ 422, CA
Held by the Court:
● Property in retention sum resides with
Contractor and is held by Employer in trust
● Retention Sum already earned by
Contractor for works already done- mere
provision for making good defects. Even if
mixed in common fund, is traceable
● No requirement to be held in separate
account or Contractor must make such
request. Contractor may not want to
jeopardise relationship/applied its mind
● Failure to separate monies cannot defeat
the trust. Release or preservation of monies
after liquidation is not preferential treatment
because monies do not belong to Employer
● Allowing retention to be part of general
funds would unjustly enrich other creditors

9. Back to Back Payments (1)
Commonly known as:
● Back-to-back
● Pay when paid
● Pay if paid

10. Back to Back Payments (2)
Not so much an issue any longer.
Section 35(1) CIPAA
● Renders conditional payment
provisions void
For discussion:
● Are conditional payment clauses in
construction contracts entered into
prior to CIPAA void?
● Wouldn’t a retrospective application of
CIPAA be an interference with vested
interests/rights?

11. Back to Back Payments (3)
Case Law: UDA Holdings Bhd v Bisraya
Construction Sdn Bhd & Anor and
another case [2015] 11 MLJ 499, HC
Central Issue: Whether CIPAA applies to
payment disputes and their underlying
contracts which arose before the coming
into force of CIPAA
Important Consideration:
● CIPAA not only introduces
adjudication but also affects
substantive rights, including:
○ Right of Contractor to suspend works
○ Right of Contractor to demand direct
payment from principal
○ Prohibition of conditional payments

12. Back to Back Payments (4)
Case Law: UDA Holdings Bhd v Bisraya
Construction Sdn Bhd & Anor and
another case [2015] 11 MLJ 499, HC
Held by Court:
● “Substantive rights” are not vested by
written law but merely in contracts
● Rights not accrued, vested or acquired
save for pending liti/ arb preserved
under s41
● CIPAA as new procedural legislation
introduces new forum, and no vested
rights under law affected, so can apply
retrospectively
● Section 35 CIPAA is merely
declaratory in nature
● In any case, if conditional payment
defence is allowed, it would defeat
CIPAA

13. Right of Contractor to
Suspend, Go Slow and
Terminate (1)
For Discussion
Based on general principles of law, do you
think that a contractor has the right to
suspend works, go slow on works, or even
terminate the contract for failure of the
Employer to make timely progress
payments?

14. Right of Contractor to
Suspend, Go Slow and
Terminate (2)
100% Safe Approach
Section 29 CIPAA
● Contractor may suspend works or
reduce rate of progress after 14 days’
notice if adjudicated sum is not paid
● When he does so, the Contractor:
○ Is not in breach of contract
○ Is entitled to reasonable EOT
○ Is entitled to recover loss and
expenses
○ Must resume work within 10 working
days after being paid

15. Right of Contractor to
Suspend, Go Slow and
Terminate (3)
Outside the scope of CIPAA, the Contractor
would have to rely on contractual provisions
or common law principles
For example, PAM:
● Failure to pay certified sums allows
Contractor to suspend works after 14
days’ notice
● Contractor may also terminate the
contract for failure to pay certified
sums or obstruction from issuance of
certificates by Employer
● Note: Going slow is not provided in all
contracts. If not provided, it would
seem a riskier approach because time
continues to run leading to potential
issues with delay/LAD

16. Right of Contractor to
Suspend, Go Slow and
Terminate (4)
Case Law: Kah Seng Construction Sdn
Bhd v Selsin Development Sdn Bhd
[1997] 1 CLJ Supp 448, HC
Facts:
● There was no formal contract
● Contractor made claims progressively
and certificates were issued
● On basis of estimated costs for
defective works and LAD, Employer
withheld payment of later certificates
● Contractor suspended works and sued
for payment. Employer counterclaimed
for damages.
So how would you decide if you were the
judge in this case?

17. Right of Contractor to
Suspend, Go Slow and
Terminate (5)
Case Law: Kah Seng Construction Sdn
Bhd v Selsin Development Sdn Bhd
[1997] 1 CLJ Supp 448, HC
Held:
● Contractor can elect to terminate if
there is repudiatory breach by
Employer or to affirm the contract and
proceed with works
● There is no intermediate right to
suspend works
● Any suspension becomes a
repudiatory breach by the Contractor
In Conclusion, how would you advise a
Contractor client who wants to suspend
works for non-payment?

18. Interim, Penultimate and Final
Certs (1)
Interim certificates:
● Issued progressively to estimate
amount and value of work carried out
and payment due to Contractor
Penultimate certificate:
● Issued after completion and before
final certificate- usually after CPC to
facilitate release of retention sums
Final certificate:
● Issued at end of contract period to
verify final amount due (after CMGD)
The effect and conclusiveness of the
certificate largely depends on the
contractual terms, but even a “conclusive”
certificate may be reviewed by an arbitrator
or challenged before a judge.

19. Interim, Penultimate and Final
Certs (2)
Example of Contractual Term in PAM:
● Final Certificates are conclusive with
regard to the final value of the works
carried out
● But not conclusive that any work,
materials, goods and designs are in
accordance with the Contract

20. Interim, Penultimate and Final
Certs (3)
Case Law: Shen Yuen Pai v Dato Wee
Hood Teck & Ors [1976] 1 MLJ 16
● This case discussed, inter alia, the
position of the Architect’s Final
Certificate
Held by Court:
● Architect is owner’s agent to give
instructions for works
● But for issuing certificates, Architect is
independent authority
● Architect owes duty of care not to
issue final certificate unless satisfied
with work. Once issued, final cert is
conclusive
● Form of cert depends on contract
terms. If no form is prescribed,
Architect can determine the form.

21. Interim, Penultimate and Final
Certs (4)
c.f. Thamesa Designs Sdn Bhd & Ors v
Kuching Hotels Sdn Bhd [1993] 3 MLJ
25, SC
Held:
Employer handed over site late to
contractor
Employer therefore not entitled to LAD
Certificate of final payment issued by
consultant authorizing deduction of
LAD is invalid and not binding on
parties
LAD which was deducted from retention
fund must be restored
Note: Article by Vinayak Pradhan questions
case- Shen Yuen Pai not brought to
Court’s attention

22. Revision of certificates (1)
PAM:
● Architect cannot revise payment
certificates except for clerical,
computational and typographical
errors
● But Architect can by a subsequent
certificate correct or modify any
valuation errors in earlier certificates
CIDB:
● Superintending Officer can by any
Interim Certificate correct any error in
previous Interim Certificate and adjust
amount due to account for any under
or over valuation

23. Revision of certificates (2)
Case Law: Fairweather Ltd v Asden
Securities Ltd (1979) 12 BLR 40
Facts:
● After issuing Final Certificate,
Architect subsequently issued CNC
Held by Court:
● After issuing Final Certificate,
Architect was functus officio and
precluded from issuing further CNC
cf. Bukit Cerakah Development Sdn Bhd v
L’Grande Development Sdn Bhd [2008] 3
MLJ 547, CA held:
● It is a question of construction and not
a question of general law as to
whether an Architect is functus

24. Claims for Direct Payment (1)
For discussion:
Can a sub-contractor make a claim for
direct payment from the Employer?
Would your answer be different if it was a
nominated sub-contractor?

25. Claims for direct payment (2)
General Principle: Privity of Contract
There is no privity of contract between a
subcontractor and an Employer to allow a
direct claim
Exceptions:
● Contractual exceptions (eg JKR
contracts)
● Statutory exceptions (CIPAA)

26. Claims for direct payment (3)
Contractual Exceptions
● JKR contracts provide for direct
payment to nominated sub-contractors
● Even in non-JKR contracts, some
NSCs require direct payment when
nominated- usually by a side letter or
supplemental agreement
● Must be agreed to by the Main
Contractor
Statutory Exception
● Section 30 CIPAA allows for requests
to be made to principal for direct
payment of adjudicated sum
● But there is no provision for
consequences to principal who fails to
comply
● So what can be done if principal fails
to comply?

27. Claims for direct payment (4)
Practical Problems with Direct Payment
● Potentially creates a collateral contract
between sub-contractor and Employer
(would it subject Employer to potential
adjudication claims?)
● Potentially an undue preference of the
sub-contractor as an unsecured
creditor in the event of insolvency of
Main Contractor
● This issue arose in:
○ Joo Yee Construction Pte Ltd v
Diethelm Industries Pte Ltd & Ors
[1990] 2 MLJ 66, HC (S’pore)
● Direct payment to sub-contractor may
not have taken into account defects or
delays, leaving main contractor
saddled with all defects and LAD
claims by Employer

28. That’s all Folks!
Thank You
Chan Kheng Hoe
khenghoe@khenghoe.com