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Tuesday, December 9, 2008

Proposed Act to protect contractors

The CIPAA will help contractors to survive the current difficult economic environment — AFP

There are signs that deteriorating economic conditions have begun to hurt the construction industry despite the Government’s injection of an additional allocation of RM7bil into the economy.

This is indeed worrying for the industry as it continues to deal with eroded profit margins, escalating costs and diminishing of projects.

A main issue affecting the construction industry has always been the problem of delayed as well as non-payment. Partly because of the complexity of construction work and partly because of financing issues, there are bound to be disputes relating to non-payment.

Remedies such as suspension of work and direct payment are difficult to be properly and lawfully exercised unless there are expressed provisions in the contract and the disputes are resolved by an independent third party.

What is needed is an avenue where dispute resolution methods can be quickly effected and are affordable. More importantly, the disputes must be resolved quickly as and when they happen.

Existing dispute resolution mechanisms in the construction industry such as arbitration and litigation are time-consuming and are often expensive.

The arbitration or litigation process normally takes two to five years or longer to be resolved and costs tens or hundreds of thousands of ringgit which will further eat into contractors’ already thin margins.

In fact, arbitration and litigation often take a long time because a detailed meticulous fact-finding process is required since the decisions are final.

Another issue is that most standard terms in construction contracts stipulate that arbitration can only commence after the project is completed or terminated.

This may be due to the fact that prolonged arbitration or litigation during the construction stage can be very disruptive.

As a result, cash flow of contractors will be affected and this will inevitably affect the progress of construction.

Consequently, innocent third-parties, such as the purchasers, are often the victims of delayed or abandoned projects.

The existing related statutory laws such as the Contracts Act 1950, Sale of Goods Act 1957 and Arbitration Act 2005 can be applied generally and are not efficient enough to deal with current problems.

To address the problem, various recommendations were made during a construction industry roundtable in June 2004 which was chaired by the former Works Minister Datuk Seri S. Samy Vellu.

One recommendation was for the creation of a Malaysian Construction Industry Payment and Adjudication Act (CIPAA).

It must be noted that there are already similar acts in Britain, Australia, New Zealand and Singapore. These include:

# Building and Construction Industry Security of Payment Act 2002 (Victoria, Australia)

# Construction Contracts Act 2002 (New Zealand); and

# Building and Construction Industry Security of Payment Act 2004 (Singapore).

All these countries recognise that timely payments are vital to the very survival and continuity of business of the construction industry. Clients are under contractual obligation to pay contractors, within the stipulated period, for services rendered and issuance of certificates of payment.

The construction industry has been waiting for far too long for the Act to be in place as it has been more than four years since CIPAA was mooted. In fact the draft for CIPAA was circulated for comments early last year.

Based on the feedback, certain parties have some strong reservations on the proposed Act. It must be stressed that they are not the main players who are being aggrieved in this regard.

The Act should be seen as vital to protect the interest of the primary players in the construction industry and more so when the contractual bargaining powers of the primary players are often not equal.

It is understood that the proposed CIPAA is now awaiting submission to the Cabinet for approval and directive so that a formal Bill can be presented to Parliament.

MBAM, therefore, urges the Government to facilitate the speedy enactment of CIPAA as the Act will help contractors across the board from G7 to G1 to survive during this difficult period where banks may adopt more prudent lending policies and the overall expected outlook for 2009 does not seem rosy.

The Act would provide some relief if contractors are assured or given some security and remedies in the key issue of payment.

Without any security of payment and quick justice through adjudication, the unpaid party either suffers in silence or is put out of business at the end of the current dispute resolution through arbitration or litigation.

In conclusion, the problems on payments in the construction industry as identified above cannot be effectively resolved contractually thorough provisions in the standard terms of construction contracts.

The most effective solution is, therefore, to enact a separate and specific Act of Parliament to address the problems.

MBAM sincerely hopes that the Government and all parties concerned will work together to get CIPAA enacted in the soonest possible time for the benefit of the industry.

By The Star

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