Australia: AIAC standard form building contracts for construction industry in Malaysia: 2019 update

Takeaways

The Asian International Arbitration Centre’s (AIAC) standard form contract (SFC) initiative is a first of its kind in the arbitration arena. Broadly speaking, it is an attempt to guide parties through issues and gaps in existing SFCs in Malaysia, and to entice them to resolve any disputes with the AIAC.

Key features – among others – include enhanced clauses with respect to delay events, insurance obligations, work programme and progress reports, and a simplified definition of practical completion.

Parties are currently able to access samples of five types of SFC:

Key developments

What are standard form contracts?

SFCs are pre-prepared contracts that consist of common clauses such as payment, variations, delay damages, and extensions of time as well as containing 'boilerplate' clauses. They attempt to streamline efforts to conclude and sign contracts – particularly to avoid significant negotiation between parties – as they leave space only for crucial party information such signatures, dates and names.

SFCs are pitched as a common instrument used by parties to improve efficiency, minimising legal and transaction costs. However, parties soon realise that they may need to significantly amend their SFCs in certain situations, particularly with high-value projects where a ‘standard approach’ is not always best.

SFC’s are often used in projects involving residential and commercial buildings. However, they rarely (appropriately) address risk allocation and project administration in public and private infrastructure projects, particularly those with complex party arrangements, structures, and significant (known and unknown) risks.

In the United Kingdom the New Engineering Contract (NEC), particularly the NEC3, is a popular and well-received standard form contract, even for public sector projects. The NEC4 was released in June 2017 and has a significant number of contracts on offer, with two new additions – Design Build Operate Contract (DBO) and Alliance Contract (ALC).

The NEC approach has not been popular in Australia (where SFCs published by Standards Australia Limited are generally preferred), but in other regions such as Hong Kong it has, and the Hong Kong Development Bureau strongly endorses the use of the NEC, regularly issuing practice notes to help guide parties.

Why the SFC initiative is important to Malaysia

AIAC’s SFC initiative is targeted at the construction industry in Malaysia, which has traditionally faced certain difficulties such as:

  • lack of best practice in safety standards;
  • poor integration with the international market;
  • manpower shortage;
  • quality issues;
  • delays;
  • abandoned projects;
  • accidents;
  • reliance on unskilled foreign labour; and
  • poor contract administration.

With respect to the latter, Malaysia is not the only nation facing this challenge. Arcadis recently reported that poor contract administration remains the number one cause of construction disputes in its 2018 Global Construction Disputes Report.

These issues are to be considered against the backdrop of the Malaysian Government’s long-standing target to become a high-income nation (ie ‘developed nation status’) by 2020 – Eleventh Malaysia Plan (11MP). According to the 11MP, one of the Government’s key objectives is to transform the construction industry by:

  • enhancing knowledge content;
  • driving productivity;
  • fostering sustainable practices; and
  • increasing the internationalisation of construction firms.

Reports published in 2017 by the Central Bank of Malaysia and Construction Industry Development Board indicate that the construction industry alone contributed 7.4% GDP in 2016, and a total project value (peak) of RM$229 billion. Statistics for Q1 2018 similarly indicate positive growth where the value of construction work increased by 5.9%, attributed to a growth in civil engineering and special trades. There was, however, a slight slowdown in growth – 5.3% in Q1 and 5.2% in Q3. These statistics clearly indicate that the construction industry has significantly contributed to the Malaysian economy, and will continue to do so.

Another important consideration, in the context of major projects, is the impact of the election result earlier this year. On 10 May 2018, Malaysia welcomed former Prime Minister Tun Doctor Mahathir back into power. Doctor Mahathir is Malaysia’s longest serving Prime Minister and serves for the second time, having retired in 2003.

One of Doctor Mahathir's early reforms included a detailed study on mega projects awarded to foreign countries. A taskforce, headed by Datuk Seri Mohamed Azmin Ali (Minister of Economic Affairs), was set up earlier this year to review these projects and to ensure that future processes are transparent.

Reform will undoubtedly have a significant effect on current projects, those in the pipeline, and future market-led proposals. Consequences may include current contracts being renegotiated or terminated, and stricter contractual provisions and risk allocations for future projects, restricted percentages of ownership, and Government-imposed JVs, particularly where major projects are led by foreign developers and investors.

That all said, Malaysia is still an attractive destination to invest in. This view is shared by Arcadis in its 2018 International Construction Costs Report, which surveyed 50 jurisdictions and reported that Kuala Lumpur is within the top five jurisdictions where it is ‘less costly to construct’.

In September 2018, the World Bank published an article which identified another challenge Malaysia is facing – its digital economy. This was also identified in the Arcadis 2018 Global Construction Disputes Report, which recognises the need for digital transformation in the construction sector. Improvements to digital infrastructure would further promote Malaysia as an attractive host country for major projects within the next few decades and offer a shortcut to the overhauling of its construction sector. Globally, the construction industry ‘…remains one of the least digitalised'.

The AIAC SFC initiative is a small contribution, yet one which will likely improve the construction industry in Malaysia. Parties will be able to streamline their processes as there will be less room for negotiation, and more for collaboration.

AIAC's goals

AIAC has seemingly responded to the Malaysian Government’s vision: cementing the notion that Malaysia ought to be one of the world’s most attractive construction markets.

Interestingly, the institution has taken a proactive approach to construction contracts, promoting dispute avoidance. This seems counter-intuitive considering that AIAC’s key mandate is to resolve disputes. AIAC evidently views this as alternative route by which it can gain the confidence of parties – that AIAC is ready and able to assist irrespective of whether parties are in dispute, or seeking advice (at an early stage) so as to identify and avoid potential disputes. AIAC’s focus on the entire relationship with potential parties (pre-contract formation through to live disputes) is a new strategy other arbitral institutions have overlooked – focusing instead on pure ‘back-end’ dispute resolution services.

The AIAC’s SFCs govern duties, rights and relationships by promoting continuity of works, accountability, transparency, and reduce ambiguity with their user-friendly plain-English set of contracts. The AIAC currently allows parties to download five SFCs, free of charge. Parties are able to customise a contract by filling out an online form with key field contents, directly via AIAC’s SFC-dedicated website. (Currently only three contracts are customisable.)

Key dispute resolution provisions in the SFCs

Dispute resolution – arbitration

Clause 34.1 of the MC is relatively prescriptive. The default rules are the AIAC Arbitration Rules, and the seat of arbitration is Malaysia.

Clause 34.2 no longer provides a non-exhaustive list of powers that the Arbitrator may exercise, as was the case in the 2017 AIAC SFC. It now refers to the powers in the AIAC Arbitration Rules and the Arbitration Act 2005.

Clause 34.3 lists situations for the commencement of arbitration, and remains unchanged.

Clause 34.4 provides that nothing shall disqualify a ‘CA’ [contract administrator] (previously, ‘architect’) from being called as a witness and giving evidence on any matter relevant to the dispute.

Clause 34.5 states that the arbitration award is final and binding.

Clause 14 of the MWC provides that parties are to refer ‘any disputes, controversy or claims’ to Arbitration. The seat of arbitration is also Malaysia. Unlike the other SFCs, the default rules are the AIAC Fast Track Arbitration Rules (revised in 2018) and no provisions deal with arbitrator powers, commencement of an arbitration, or an award being final and binding. However, Rule 19.7 of the AIAC Fast Track Arbitration Rules provides that an award is final and binding on the parties.

Clause 25 of the SC is relatively similar to the MC, but deals with commencement of arbitration in a different manner – it does not list exceptions.

A unique provision in the SC is Clause 25.4, which allows for the consolidation of arbitration proceedings where a dispute arises in connection with the Main Contract and concerns the Sub-Contract Works. In this event, the Contractor must provide written notice to the Sub-Contractor indicating that the dispute under the Sub-Contract will be referred to the appointed arbitrator under the Main Contract. This is subject to the agreement of the Employer. Clause 25.5 states that any award is final and binding.

Dispute resolution – meditation

Clause 35.1 of the MC allows parties to refer their dispute to mediation. The contract provides that mediation is to be in accordance with the AIAC Mediation Rules (updated in 2018).

Clause 35.2 provides that prior reference to mediation does not prejudice the parties’ rights to arbitration, nor is it a condition precedent to arbitration.

Clause 35.3 clarifies that parties may refer their disputes to mediation at any time, whether before or during any arbitration or other proceeding, including litigation.

Clause 26 of the SC deals with mediation in a similar fashion, with respect to matters related to the carrying out of the Sub-Contract Works, whether in contract or in tort.

As in the earlier (2017) edition, the 2018 MWC does not provide for any mediation process, only arbitration via AIAC’s Fast Track Arbitration Rules.

Other key provisions

Provisions targeting bribery and corruption

Clause 13.1(a) of the MWC provides that the employer is entitled to terminate the contract based on reasonable evidence of ‘illegal bribery or corrupt practices relating to and/or in connection with the execution of the Works’. This provision is relatively broad and may capture a range of conduct.

Clause 21.4 of the SC is similar, however is a more substantive provision that defines unacceptable conduct on the part of the Sub-Contractor: ‘bribe, gift, gratuity, commission or other thing of value, as an inducement or reward’ either directly or indirectly. If the subcontractor or his ‘personnel, servants, agents or workmen’ have engaged in such conduct, the Contractor must send the Contract Administrator (previously Architect) a written report of this alleged bribery or corrupt practice. The previous rules required a copy of the report to be provided to the Employer – this is no longer the case.

Clause 21.4(b) provides an exception where the Contractor may not terminate the Sub-Contractor’s engagement if the inducements and rewards are lawful.

Clause 25.4 of the MC adopts similar wording to that in the SC – where the Employer may terminate the Contractor’s engagement. The Employer or the Contract Administrator (on behalf of the Employer) must give the Contractor 14 days' written notice before terminating their engagement. The burden is on the Contractor to show that their conduct was lawful.

Highlights

The SFCs comply with the Construction Industry Payment and Adjudication Act 2012 (CIPAA). The CIPAA (Act 746) was introduced to allow parties to resolve payment disputes via statutory adjudication, and are relevant to construction and engineering projects. The CIPAA has been in effect since 15 April 2014, and many regard it as an important development for the sector. The AIAC (via its former title of KLRCA) is the appointed Adjudication Authority by virtue of Part V of CIPAA, and is responsible for administering adjudications under the Act.

Conclusion

The suite of AIAC’s SFCs has been tailored to the Malaysian market and are relevant to a range of parties including employers, contractors, sub-contractors, and consultants.

The difficulties Malaysia has experienced in its construction industry are not exclusive to that country. As other jurisdictions face similar issues, it will be interesting to observe whether other arbitral institutions follow AIAC’s lead and publish their own set of contracts to address issues in their respective region.

SFCs are a useful tool for new or inexperienced parties. However, they do not offer a ‘one-size-fits-all’ solution. When preparing early-stage legal documentation, parties should obtain specific legal advice as to whether or not an SFC is appropriate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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