Limits to Adjudicators’ Powers

Our Tasha Lim discusses the High Court’s decision in Cescon Engineers Sdn Bhd v Pesat Bumi Sdn Bhd and another case [2022] 9 MLJ 79 with respect to adjudicators’ powers.

Introduction

Adjudicators are granted wide discretionary powers under section 25 of the Construction Industry Payment and Adjudication Act 2012 (CIPAA).

The High Court recently discussed whether there is a limit to the adjudicator’s powers to “inquisitorially take the initiative to ascertain the facts and the law required for the decision”, especially when such facts and law would have a significant impact upon the adjudication decision.(1)

Facts

The defendant, Pesat Bumi Sdn Bhd (PB), appointed:

  • Geo Hill Construction Sdn Bhd (Geo Hill) to carry out the construction of a building; and
  • the plaintiff, Cescon Engineers Sdn Bhd (Cescon), to provide engineering and project management consultancy services.

The consultancy services were on an agreed percentage fee of 1.95% based on the total construction cost of the project.

After the final accounts for the project were complete, Cescon submitted a payment claim for 2,163,990.88 Malaysian ringgit. However, PB was only prepared to pay the sum of 514,277.74 Malaysian ringgit and disputed the balance.

The dispute was referred to an adjudication proceeding. After the exchange of the adjudication claim, the adjudication response and the adjudication reply, the adjudicator requested a clarification session and an extension of time to deliver the adjudication decision (AD).

On 19 June 2020, the AD was delivered. The adjudicator allowed Cescon’s claim and ordered PB to bear the full costs of the adjudication.

PB filed an application to set aside the AD at the High Court. Premised on section 15(b), (c) and (d) of the CIPAA, it contended that the adjudicator had:

  • breached the rules of natural justice;
  • not acted independently or impartially; and
  • acted in excess of his jurisdiction.

PB alleged that the adjudicator had acted in breach of natural justice due to the fact that he had:

  • conducted a Companies Commission of Malaysia (CCM) search on Geo Hill and PB without the knowledge of parties and used the information in the CCM search without first showing a copy of the search to the parties;
  • used the information from the CCM search, which was inaccurate, to draw a link between the shareholders and directors of Geo Hill and PB, who are biological brothers (the Leong Brothers), without informing the parties that he intended to do so.
  • drawn adverse inferences arising from the assumed close relationship between the directors and shareholders of Geo Hill and PB without giving PB any opportunity to rebut or address that the contractual arrangements between Geo Hill and PB were “not at arms’ length”.

It is worth noting that Geo Hill was not a party to the adjudication.

Decision

While it is well recognised that adjudicators have wide discretionary powers, including the power to “inquisitorially take the initiative to ascertain the facts and the law required for the decision” under section 25(i) of the CIPAA, such power is not unfettered and must adhere to the rules of natural justice.

The Court referred to the cases of Samado Sdn Bhd v Kerajaan Malaysia(2) and Geoforce East Sdn Bhd v Melati Evergreen Sdn Bhd and another summons(3) as well as the writings of Lam Wai Loon and Ivan YF Loo in Construction Adjudication in Malaysia(4) on the legal principles surrounding the rules of natural justice in adjudication, which are as follows (among others):

  • The parties must be given the opportunity to comment upon any point or issue that is decisive or of considerable potential important to the outcome of the resolution.
  • The adjudicator must inform the parties of any views that are formed independently and any information relied upon that was obtained on their accord based on their own initiative or investigation.
  • A breach by the adjudicator must be a material breach and not one that is peripheral.

In coming to his decision, the adjudicator relied on the results of the CCM search, drawing an adverse inference from the relationship of the Leong brothers. He opined that even if there was a commercial agreement between PB and Geo Hill, it was “not an arm’s length agreement” as stated in his AD.

The Court agreed that procedural fairness dictates that the adjudicator should have shown the CCM search to the representatives of PB and Cescon during the clarification session. The adjudicator should have also given an opportunity to the parties to comment on the information in the CCM search and address the effect of, if any, the relationship of the Leong brothers and their roles in PB and Geo Hill on the issues of certification and validity.

The Court held that the adjudicator’s conduct in relying on the CCM search had taken PB by surprise, given that the adjudicator had earlier given a ruling on 16 April 2020 to the effect that the facts and concerns raised by Cescon in respect of the issue of conflict had no merits as the claim was against PB. Given this ruling, PB would have been taken by surprise as the “relationship” appeared to have created an impression in the mind of the adjudicator that led to the adverse inference that PB had colluded with Geo Hill to reduce Cescon’s professional fees. Such breaches by the adjudicator were material.

As such, the Court allowed the application to set aside the AD based on section 15(b) of the CIPAA, finding that there was no need to make a determinative finding on limbs (c) and (d) of section 15 of the CIPAA.

Comment

The High Court has quite clearly highlighted that while adjudicators do have the power to inquisitorially take the initiative to ascertain the facts and law required for the adjudication decision, if such facts and law are to have a material impact upon the decision, the parties to the adjudication should be given an opportunity to address them. This is especially so in this case, given that neither party had the opportunity to address them during the adjudication claim, adjudication response or adjudication reply stages.

It is not sufficient for the adjudicator to merely inform the parties that a particular information would be relied upon; instead, they must seek the veracity of such information. Unlike a situation where the adjudicator is to “draw on his own knowledge and expertise”, a reliance on third-party information such as the CCM search would still have to be verified, or – at the very least – the parties should have been given the opportunity to address the adjudicator’s inferences.

In any event, adjudicators must always bear in mind that they must be guided by the rules of natural justice to ensure that an adjudication is conducted fairly and that the parties are offered fair and equal opportunities.

For further information on this topic please contact Tasha Lim Yi Chien at Gan Partnership by telephone (+603 7931 7060) or email (tasha@ganlaw.my). The Gan Partnership website can be accessed at www.ganlaw.my.

Endnotes

(1) Cescon Engineers Sdn Bhd v Pesat Bumi Sdn Bhd and another case [2022] 9 MLJ 79.

(2) [2020] MLJU 274.

(3) [2020] MLJU 1063.

(4) Second edition, 2018, Sweet & Maxwell.

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