M&E Subcontractor Recovers 100% of a RM400k–500k Retention Claim on a Government Project

Background

The subcontractor supplied, installed, tested and commissioned the air-conditioning and mechanical ventilation systems for a group of low-rise government office buildings in Selangor. It was a nominated subcontractor under PWD Form 203N, appointed by Letter of Award. The sub-contract sum was RM8.5m–9m. After variations and omissions, the final value of the works was just over RM9m.

The works were completed. In late 2020 the employer's quantity surveyor issued the final certificate, which certified the full value of the subcontractor's work. The defects liability period ended in early 2022. In early 2023 the main contractor wrote to the employer asking for the Certificate of Making Good Defects, confirming that the works complied with the main contract.

By then the subcontractor had been paid all but RM400k–500k. That balance was its 5% retention. More than three years after the final certificate, it was still unpaid.

The dispute

The subcontractor served a payment claim in 2024 for the unpaid balance of the final certificate, RM400k–500k. It said the sum fell due 45 days after the final certificate, in late 2020.

In its payment response, the main contractor disputed the whole amount. It said the employer had imposed RM400k–500k in electricity and water charges, which the Letter of Award allowed it to pass on, and that the parties were still negotiating the subcontractor's share.

Before adjudication the parties had tried to settle. The subcontractor offered to accept a back charge of under RM100k as goodwill, on condition that the balance was paid quickly. The balance was not paid. The main contractor then said it could impose further back charges. The subcontractor formally withdrew its offer and claimed the full certified sum.

In its adjudication response, the main contractor raised new defences that did not appear in its payment response:

• CIPAA did not apply, because the buildings were under four storeys and the project was security-related and exempt.
• Under the Letter of Award, the Government, not the main contractor, paid nominated subcontractors directly.
• Retention could only be released after the subcontractor gave a statutory declaration that its workers had been paid.
• Disputes had to go to the Superintending Officer and then arbitration first.

Key issues and how they were argued

1. Did CIPAA apply? The main contractor relied on section 3 of CIPAA, which excludes contracts made by a natural person for a building under four storeys that is wholly for that person's own occupation. The adjudicator held that all three elements must be shown. Here the parties were companies and the buildings were not for anyone's own occupation, so section 3 did not apply.

The main contractor also relied on the Exemption Order under section 40, which exempts government construction contracts relating to national security. The subcontractor relied on Enra Engineering and Fabrication Sdn Bhd v Gemula Sdn Bhd and Mudajaya Corp Bhd v Leighton Contractors (M) Sdn Bhd. The adjudicator agreed that the Exemption Order must be read narrowly, that "not everything that is built or constructed in a military camp relates to national security", and that a government construction contract needs the government as a party. Air-conditioning works in office buildings did not qualify. CIPAA applied.

2. Who had to pay? The adjudicator held that the main contractor did. The subcontractor's contract was with the main contractor, so it had no contract with the employer. Its payment vouchers and bank-in slips showed that earlier payments had come from the main contractor. The main contractor had also written that it would pay once it was paid by the developer. The adjudicator found the reliance on the direct-payment clauses "clearly an afterthought".

3. Was the payment conditional? Under section 35(1) of CIPAA, a conditional payment term is void. The adjudicator applied this to the final payment clause that the main contractor relied on. The 45-day payment period in the sub-contract applied instead, so the balance had been due since late 2020.

4. What about the statutory declaration? The main contractor said it had asked for one in a letter in late 2023, but it did not produce that letter in the adjudication. The adjudicator could not rely on it.

5. Was the value proven? Yes. The final certificate had been verified by the employer's quantity surveyor. The main contractor had accepted that value and admitted, more than once, that the balance was outstanding. Because the goodwill offer had been withdrawn, the full certified balance was due.

The decision

• 100% of the claim (RM400k–500k) awarded
• Jurisdictional challenges under sections 3 and 40 of CIPAA dismissed
• Payment within two weeks of the decision
• Interest and costs not awarded, because the payment claim had not asked for them

Lessons for contractors

1. 1Retention on a government project can still go to CIPAA. An exemption argument needs more than a government end user. The parties to the contract and the nature of the works matter.
2. 2Pay-when-paid does not protect a main contractor. Under section 35 of CIPAA, a term that makes payment depend on someone else paying first is void.
3. 3Make goodwill offers conditional, and say so in writing. The subcontractor's offer was tied to quick payment, so it could withdraw it and claim the full sum.
4. 4Keep proof of who paid you. Bank-in slips and payment vouchers showed who the real paying party was.
5. 5Claim interest and costs in the payment claim itself. If they are left out, the adjudicator cannot award them later, even when you win.