By s 35 of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA 2012”), all conditional payment clauses are void. In Lion Pacific Sdn Bhd v Pestech Technology Sdn Bhd and another appeal  MLJU 2109, the claimant argued in adjudication that a payment clause that says payment is only to be paid upon Ministry of Transport (MOT) certification of payment is also void by reason of it being conditional.
The specific clause says:
“Verification and approval by ICC-MOT 15th – 24th every month. Payment to Sub-Contractor 40 days after certification by MOT”.
Of course, it is commonplace for construction contracts to provide that payment is to be made after certification. It is also common for employers to simply not certify payment for works done, leading to claims in CIPAA for uncertified sums.
In this case, Pestech claimed for RM24 million value of works which were not certified, and which Lion Pacific said was not payable due to non-certification by the MOT. In reply, Pestech alleged that the requirement for their value of works to be certified was a “conditional” payment clause and void under s 35 CIPAA 2012 – an argument that perhaps was a tad too far.
Nevertheless, the Adjudicator found in favour of Pestech, and so did the High Court. The learned High Court Judge held that to allow the payment clause to stand would mean that payment would be conditional upon certification, which would go against the object of CIPAA 2012 to facilitate timely and regular payments to contractors.
However, on appeal, the Court of Appeal held that the High Court was in error in finding a “pay-if-certified” clause to be conditional. Since parties had mutually agreed that the obligation to pay would only arise upon certification, therefore the express intention of parties ought not be disregarded and the certification was a critical prerequisite to determine the progress of Pestech’s works.
Pestech probably went too far to argue that a pay-if-certified clause is a conditional clause which is rendered void by s 35 CIPAA 2012. After all, nearly all construction contracts carry a pay-if-certified clause. Instead, Pestech ought to have argued that there was an obligation to certify which has been breached, and therefore the adjudicator in exercising his powers under s 25(m) CIPAA 2012 ought to review and revise any certificate issued “or to be issued”. In other words, the adjudicator is well empowered to certify works done in lieu of certification by the employer.
However, it is also problematic for the Court of Appeal to uphold the pay-if-certified clause unconditionally, because it is a reality in the construction industry for works not to be certified despite having been carried out. If an obligation to pay is conditional upon certification, then the lack of certification would mean contractors do not get paid for works done. Now, Lion Pacific v Pestech involved certification by a third party (the MOT), but in many cases, certification is by the employer/main contractor itself who has a vested interest not to certify (or to under-certify) works carried out.
In other words, Lion Pacific v Pestech is a case that must be read with caution and must not be stretched to the point of disallowing uncertified value of works on the basis that an obligation to pay would not have arisen. Otherwise, it would merely encourage employers/main contractors to simply refuse and/or under-certify works in order to reduce its own obligation to pay.
Written by: Chan Kheng Hoe ([email protected]).