Formwork Subcontractor Recovers 100% of a RM400k–500k Final Account Balance Years After Completion

Background

The subcontractor was a sole proprietorship that supplied labour to install and dismantle aluminium system formwork. In mid-2015 the main contractor appointed it by Letter of Acceptance, incorporating the PAM Contract 2006 and the PAM Sub-Contract 2006, for a high-rise serviced apartment development in Kuala Lumpur.

The provisional sub-contract sum was RM4.5m–5m, subject to final measurement against a schedule of rates. Section completion dates ran to early and mid-2016. The overall sub-contract completion date was early 2017.

The subcontractor said it finished its works in 2016. In mid-2017 it submitted its first final claim. The main contractor disagreed with it and, in mid-2018, issued a final account that fixed the final sub-contract sum at RM3m–3.5m after omissions.

Neither side ever disputed that final account value. Payment did not follow. In mid-2022 the subcontractor sent a revised final claim based on the final account, and repeated that it did not accept the debit notes deducted from its earlier payments.

The dispute

In mid-2023 the subcontractor served a payment claim under CIPAA 2012 for RM400k–500k. That was the final account value less what it had actually received, and it included the retention sum.

The main contractor disputed the whole amount and raised a set-off of RM600k–700k. It was made up of debit notes for rectification and completion work said to have been done by others, and liquidated damages that the main contractor said it had paid to the employer because of the subcontractor's delay.

The payment response was emailed first, but the hard copy only arrived by courier after the 10-working-day deadline. The adjudicator held that email service was not valid under section 38 of CIPAA, because the parties had not agreed it in writing. The payment response was therefore late, and under section 6(4) the whole claim was treated as disputed.

In adjudication, the main contractor also argued that:

• The Letter of Acceptance had been addressed to and signed by another individual, with the proprietor only as witness, so the wrong person had started the adjudication.
• The claim was time-barred under the Limitation Act 1953, because six years had passed since the first final claim.
• The subcontractor had accepted the debit notes by issuing invoices net of them.
• The claims consultant could not recover its fees, because it was not a law firm.

Key issues and how they were argued

1. Jurisdiction. The adjudicator noted that CIPAA does not let an adjudicator decide his own jurisdiction. He used section 27(3) to proceed with the adjudication, leaving either party free to raise the point in a setting-aside or enforcement application. The subcontractor relied on case law that a sole proprietor contracts through its business name and must bring the CIPAA claim itself.

2. How much was outstanding? The parties disagreed on how much had been paid. The subcontractor produced its bank statements and the main contractor produced payment vouchers. One cheque did not appear in the bank statements. The main contractor's own documents for it were inconsistent, with a handwritten note in a different hand and an acknowledgement for a different amount. The adjudicator accepted the subcontractor's figure for payments received.

3. Were the debit notes a valid set-off? No. Clause 26.13 of the PAM Sub-Contract 2006 says no set-off may be made unless the contractor gives full details and a written notice, by hand or registered post, at least 28 days before the deduction. There was no evidence of either. The invoices argument was described as weak, because the subcontractor's progress claims never showed the deductions and it had objected to them in writing. The adjudicator added that non-compliance with the set-off clause cannot be cured by an estoppel argument.

4. Were the liquidated damages a valid set-off? No. Clause 16 of the PAM Sub-Contract 2006 requires the contractor to issue a certificate of non-completion for the sub-contract works before any set-off for delay. None was issued. The certificates of non-completion and practical completion that the main contractor produced related to the main contract works, not the sub-contract scope. It had not shown that the subcontractor was actually late, or how responsibility for the delay should be shared.

5. Retention. The main contractor's own final payment certificate, which it produced in the adjudication, was marked as releasing all retention. The adjudicator treated this as an admission that the retention was already due.

The decision

• 100% of the claim (RM400k–500k) awarded
• Debit-note set-off of RM300k–400k dismissed
• LAD set-off of RM200k–300k dismissed
• Interest at 5% per annum from the due date in 2022 until full payment
• Full costs of the adjudication (under RM100k), including the claims consultant's fees and the adjudicator's and AIAC fees
• Payment within 14 days of the decision

Lessons for contractors

1. 1An old final account can still be claimed. Here the final account was five years old when the claim was decided, and the subcontractor still recovered the full balance.
2. 2Object to deductions in writing, every time. The subcontractor's progress claims never showed the debit notes, and its letters disputed them. That defeated the argument that it had accepted them.
3. 3Set-off needs the contract procedure. Under the PAM Sub-Contract 2006, debit notes and delay damages both depend on clause 26.13 notices, and delay damages also need a sub-contract certificate of non-completion.
4. 4Main contract LAD is not automatically yours to pay. A delay certificate on the main contract does not prove the subcontractor was late.
5. 5Keep your bank statements. They decided the disputed payment in the subcontractor's favour.