THE UPDATE SCOOP (#13/2025)
THE UPDATE SCOOP (13 # 2025 )
Validity of Conditional Payment clause in Court or Arbitral proceedings | Arbitration
By TAY & HELEN WONG – November, 2025
It is widely recognized that the Construction Industry Payment and Adjudication Act 2012 (CIPAA2012) was enacted to facilitate regular and timely payment, to provide expeditious dispute resolution via adjudication and to provide quick remedies to recover payment in the construction sector. In tandem with such objective, CIPAA2012 has outlawed any conditional payment provision in a construction contract which encompasses situations when the obligation of one party to make payment is conditional upon that party having received payment from a third party and when obligation of one party to make payment is conditional upon the availability of funds or drawdown of financing facilities of that party : see s.35 of CIPAA2012. The issue that arose before the Court of Appeal (COA) in the case of SPM Energy Sdn Bhd & Anor v Multi Discovery Sdn Bhd [i] (SPM Energy) was whether such a conditional payment clause in a construction contract [clause 5 of the Letter of Award (the LOA) from the 1st Defendant to the Plaintiff] was invalid in court or arbitral proceedings pursuant to the said s.35 when NO adjudication proceedings had been commenced under CIPAA2012. In other words, is s.35 of CIPAA2012 applicable to nullify such conditional payment provision in respect of a dispute brought before civil court and arbitral proceedings ?
Prior to SPM Energy, there were conflicting High Court decisions, with one decision[ii] ruling that the said s.35 only applies in adjudication proceedings and not in court or arbitral proceedings and three decisions[iii] that the said s.35 can invalidate back-to-back payment provisions in construction contracts in court or arbitral proceedings. There was an earlier COA decision[iv] that had left open the question.
Upon interpreting the relevant provisions in CIPAA2012 to ascertain the intention of the Parliament, the COA in SPM Energy held that the said s.35 applies to court/arbitral proceedings even when there are no adjudication proceedings and this was premised on four grounds[v]. There were however two exceptions in which the said s.35 was held to br inapplicable, namely the existence of circumstances as stipulated in s.3 of CIPAA2012 [construction contract entered by a natural person for construction work of building less than 4 storeys high and wholly intended for his occupation] and where person, contract, matter or transaction has been exempted from the application of CIPAA2012 under s.40 by the Minister as defined.
In the premises, clause 5 of the LOA was void and was rendered irrelevant for the purpose of the appeal.
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Tag: arbitration | court proceedings | non-adjudication | conditional payment | s.35 CIPAA
[i] [2025] MLJU 515
[ii] Bond M&E (KL) Sdn Bhd v Isyoda (M) Sdn Bhd [2017] MLJU 376
[iii] Khairi Consult Sdn Bhd v GJ Runding Sdn Bhd [2021] MLJU 694, MN Global Venture Sdn Bhd v CB Bersatu Sdn Bhd [2022] MLJU 998 and Multi Network Sdn Bhd & Anor v Pembinaan Jari Jaya Sdn Bhd [2022] MLJU 3452.
[iv] JDI Builtech (M) Sdn Bhd v Danga Jed Development Malaysia Sdn Bhd [2024] 4 MLJ 29
[v] Please refer to paragraph [36] of SPM Energy.