Construction Law – A Practical Guide for Beginners

Introduction
 
More common than not, construction law may seem daunting to new practitioners, often due to its perceived complexity and challenging nature.  While there may be some truth to this at the first blush, once you grasp the fundamentals, it pans out to be no more challenging than any other legal fields.  This article aims to provide a guide and demystify construction law by focusing on key aspects of construction claims and disputes, providing a solid foundation for newcomers.
 
Understanding the Nature of Dispute
 
For starters, before resolving a dispute, it is crucial to understand what the dispute is about.  Most construction disputes (common ones) involve issues such as payment for work done, retention sums or damages for delays and defects.
 
Type of Claims
 

1. Work done / payment certificates

A bulk of construction disputes revolves around claims for work-done.  Generally, the claiming party relies on a submitted progress claim or, ideally, an interim or payment certificate that supports the claim for payment.  For context, Tropicon Contractors Pte Ltd v. Lojan Properties Pte Ltd [1989] 3 MLJ 216 serves as an essential starting point to understand the critical role of payment certificates.
 

2. Release of retention sum

Construction contracts often include a provision allowing the paying party to withhold a portion of the payment, known as a retention sum.  This sum is typically held until certain conditions are met, such as the issuance of a Certificate of Completion (“CCC”) and a Certificate to Make Good Any Defects (“CMGD”), or the expiration of the defect liability period. Two significant cases have addressed this practice, i.e SK M&E Bersekutu Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd (in creditors’ voluntary liquidation) and another appeal [2019] 3 MLJ 281) and Jetara Sdn Bhd v Maju Holdings Sdn Bhd [2007] 3 MLJ 609.
 

3. Liquidated ascertained damages or back charge for defective work / materials supplied

While these claims can be made independently, they are often included as deductions in the final account in construction disputes, potentially reducing or nullifying the claimed amount.  The key issue is whether such deductions are lawful and permitted under contract.  New practitioners can refer to Pembenaan Leow Tuck Chui & Sons Sdn Bhd v Dr Leela’s Medical Centre Sdn Bhd [1995] 2 MLJ 57 and Brunsfield Construction Sdn Bhd v LDE Aluminium Industries Sdn Bhd [2019] 6 MLJ 784 which provide valuable insights into how the Courts have handled these issues.
 
Key Parties in Constructions Contracts
 
In a construction contract, the three key players are the employer, the main contractor, and the subcontractor.  For example, in constructing a condominium, the employer is the developer, the main contractor oversees the overall project, and subcontractors handle specific aspects like electrical, façade, landscaping, swimming pool, air conditioning, lifts, and firefighting systems.  The subcontractors report to the main contractor, who is accountable to the employer / developer.  Payment typically follows this chain unless a novation agreement changes the structure.
 
Generally, the subcontractor claims payment from the main contractor, who in turn claims from the employer.  Although subcontractors lack privity with the employer, they may have direct claims against the employer in certain cases — such as under section 71 of the Contracts Act 1950 (Tanjung Teras Sdn Bhd v Kerajaan Malaysia [2015] MLJU 2161) or under section 30 of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA 2012”).
 
Claims Process
 
In essence, reaching a specific milestone in the contract allows the contractor to submit a claim, which then undergoes a verification and certification process.  The exact requirements depend on the contract type, such as the Public Works Department Jabatan Kerja Raya, (“JKR”), Malaysian Institute of Architect (Pertubuhan Arkitek Malaysia, (“PAM”), Fédération Internationale Des Ingénieurs-Conseils (“FIDIC”), Asian International Arbitration Centre (“AIAC”), or a bespoke contract.  Each has specific claim procedures—for example, PAM 2018 under clause 30.1 and FIDIC under clause 20.1.
 
The contractor submits an application for payment with the required documents, showing the milestone achieved.  This application is typically certified by a quantity surveyor or architect, depending on the contract.  Once certified, the architect issues an interim payment certificate to the main contractor or employer for payment.
 
Most importantly, the contractor can still initiate CIPAA proceedings even if the claim has not been certified, as under section 25(m) of CIPAA, the adjudicator has authority to review any certificates, issued or pending.
 
Dispute resolution

In most disputes, non-payment is the main issue.  In Malaysia, when a party refuses to pay, the dispute can be resolved through several routes:

1. Arbitration: settling the dispute through an arbitrator;
2. Adjudication: resolving the issue via an adjudicator; and
3. Litigation: filing a claim in Court.

Mediation is also an option, although it often begins after the matter is already filed in court or arbitration.  This is not always the case, but seems to be a trend in Malaysia.
 

1. Arbitration

Construction contracts often include an arbitration clause, which generally rules out litigation unless both parties mutually agree to waive arbitration.  If one party files a court dispute despite an arbitration clause, the other can apply to stay proceedings under Section 10(1) of the Arbitration Act 2005.  However, an arbitration clause does not bar parties from initiating adjudication, so disputes can still be referred for adjudication even with an arbitration agreement in place.
 

2. Adjudication

Adjudication, as introduced by CIPAA, was designed to address cashflow issues in the construction industry.  Despite its potential to resolve disputes faster than litigation (with decisions made within four months), the process can still be considerably lengthy.  After the adjudication decision is made, the successful party must register the decision at the High Court under section 28 of CIPAA for enforcement purposes.  The losing party can then apply to set aside the decision (section 15) and apply for a stay (section 16), which could delay enforcement by three to five months.
 
The Rules of Court 2012 were amended to include section 69A, which outlines the procedures for enforcement, setting aside, and staying adjudication decisions.
 
A current trend is when a successful party may issue a notice under sections 465 and 466 of the Companies Act 2016 as a pressure tactic, even before the enforcement order is obtained.  The Court of Appeal decisions such as Bludream City Development Sdn Bhd v Pembinaan Bina Bumi Sdn Bhd [2024] 4 MLJ 67, Likas Bay Precinct Sdn Bhd v Bina Puri Sdn Bhd [2019] 3 MLJ 244, and Sime Darby Energy Solution Sdn Bhd v RZH Setia Jaya Sdn Bhd [2022] 1 MLJ 458 suggest that a winding-up notice can be issued before obtaining the enforcement order, though each case's facts may vary and impact the validity of such notices.  At this juncture, there is no Federal Court decision that has addressed this issue.
 

3. Litigation

One may argue that filing for summary judgment in court could be a faster and more cost-effective solution, as it avoids adjudicator or arbitrator fees and AIAC administrative costs.  This approach may be viable if the construction contract lacks an arbitration clause.  However, once an arbitration clause is invoked by the other party, court litigation is generally no longer an option.  Still, if one party can demonstrate that the other is not committed to arbitration — for instance, by failing to pay the necessary deposit, litigation may proceed.  See Kebabangan Petroleum Operating Co Sdn Bhd v Mikuni (M) Sdn Bhd & Ors [2021] 1 MLJ 693 for a relevant example.
 
Practical Tips for Newcomers
 
Ultimately, these following pointers may be helpful:

1. Thoroughly read and understand the construction contract;
2. Familiarise yourself with standard form contracts (JKR, PAM, FIDIC, AIAC, etc);
3. Study key cases mentioned in this guide to understand legal principles;
4. Pay attention to claim documentation and certification processes; and
5. Be aware of time limits and notice requirements in contracts (if any).

Conclusion
 
While construction law has its complexities, focusing on understanding the nature of claims, contractual relationships, and dispute resolution methods will provide a solid foundation.  As you gain experience, you will find that many principles are consistent across different cases and contracts.  Remember, the key to success in construction law is attention to detail, thorough contract analysis, and a clear understanding of the relationships between parties involved in a project.  If you have these in place, it could perhaps spark a new interest in construction law!