1 Legal framework

1.1 Which legislative and regulatory provisions govern construction projects in your jurisdiction?

Construction projects in West Malaysia are primarily governed by the Town and Country Planning Act 1976 and the Street, Drainage and Building Act 1974, which set out the guidelines and standards for development plans and the proper control of buildings in Peninsular Malaysia. The other relevant regulations include:

  • the Architects Act 1967;
  • the Contracts Act 1950;
  • the Federal Roads Act 1959;
  • the Quantity Surveyors Act 1967;
  • the Registration of Engineers Act 1967;
  • the Malaysian Highway Authority Act 1980;
  • the Construction Industry Development Board Act 1994;
  • the Federal Roads (Private Management) Act 1984;
  • the Road Transport Act; and
  • the Town Planners Act 1995.

In East Malaysia, the main laws governing construction projects include the following:

  • Sarawak:
    • the Sarawak Land Code;
    • the Building Ordinance 1994; and
    • the Housing Developers (Control and Licensing) Act 1966.
  • Sabah:
    • the Sabah Land Ordinance;
    • the Local Government Ordinance 1961;
    • the Housing (Control and Licensing Developers) Rules 1980; and
    • the Town and Country Planning Ordinance (Cap 141).

1.2 What other legislative and regulatory provisions have relevance for construction projects in your jurisdiction?

The Construction Industry Payment and Adjudication Act 2012 governs payment claims within the construction industry. The aim was to establish a cheaper and swifter system of dispute resolution for work done and services rendered under construction contracts. The Asian International Arbitration Centre (Malaysia) is the adjudication authority which is primarily responsible for the administration and conduct of adjudication proceedings.

The Arbitration Act 2005 is also applicable to disputes in the construction industry and arbitration is often the preferred method of alternative dispute resolution, as it allows the parties to choose the arbitrators, who may be construction professionals. Also, arbitration proceedings are private and confidential, which can be a major consideration in complex construction disputes.

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The Ministry of Works is responsible for the development plan for federal road networks nationwide.

The Construction Industry Development Board (CIDB), established under the Construction Industry Development Board Act, is a statutory body under the Ministry of Works which:

  • regulates, develops and facilitates construction activities;
  • promotes the construction services sector; and
  • monitors the implementation of regulations in the construction industry.

The CIDB's powers include the power to:

  • carry out activities relating to the construction industry;
  • issue formal recognition and written assurances, including certificates for the purpose of certification; and
  • impose fees and charges.

1.4 What is the general approach in regulating the construction sector?

The CIDB continually produces recommendations, guidelines and training in order to improve the regulation of the construction sector. It works together with other relevant bodies, such as local authorities, to ensure compliance with the specific regulations and/or laws under each party's jurisdiction.

2 Procurement methods

2.1 What procurement methods are most commonly used in your jurisdiction? Do these vary depending on whether international parties are involved?

Several procurement methods are adopted for construction projects in Malaysia. The most common is the traditional/conventional procurement method, whereby works are divided into two parts: the architect is responsible for the design work, while the contractor is responsible for the construction work. This is a preferred option for government contracts and private sector projects.

The other procurement method that is popular in Malaysia is the design and build method. In this case, the contractor is responsible for both the design work and the construction work. The client deals directly with the contractor for completion of the building. This procurement method is suitable for large, complex and specialised projects.

The project delivery partner (PDP) model is also used in Malaysia. The PDP is responsible for the delivery of the full project within a specific timeframe. The PDP will also recommend the implementation and construction of all aspects of the work, and will ensure the performance of all other contractors. The PDP model is normally used in a large government projects, although in recent years the preference has been for turnkey contracts.

The type of procurement method is often chosen based on the client's preference and the complexity of the project. This is also the case where international parties are involved.

2.2 What are the advantages and disadvantages of these different methods?

  • Traditional/conventional procurement:
  • Advantages: The client has full influence and control over the overall process of the project. The client also has more time to review and correct the design before construction starts. This can increase the quality and functionality of the project.
  • Disadvantages: As the design phase must be completed before construction can begin, the project may take a longer period of time to complete. If a conflict over defects arises, it can often be difficult to identify whether the defects have resulted from the design or from the materials and labour.
  • Design and build:
    • Advantages: The duration of the project is shorter, which can reduce the project costs. As one party has sole responsibility, the project is easier for the client to manage and the client will know the total financial commitments of the project in the early stages.
    • Disadvantages: If there is any change to the original design during the project, this may incur additional costs. The contractor has more control over the design; hence, the client has less of a say in this regard.
  • PDP:
    • Advantages: The PDP assumes complete risk ownership and accountability for delivery of the project within the agreed timeframe.
    • Disadvantages: The client has less control over the project and must rely on the management capability of the PDP. There may be changes to the project from time to time.

2.3 What other factors may influence the choice of procurement method?

The other factors that may influence the choice of procurement method include:

  • costs;
  • time;
  • complexity;
  • experience;
  • quality; and
  • flexibility to make changes and variations.

For example:

  • the traditional/conventional procurement model presents advantages in terms of costs and quality, but at the expense of time;
  • the design and build procurement presents advantages in terms of costs and time, but at the expense of quality; and
  • the PDP model presents advantages in terms of time and quality, but at the expense of costs.

3 Project structures

3.1 How are construction projects typically structured in your jurisdiction? Does this vary depending on whether international parties are involved?

The structure of construction projects will typically depend on the type of project. The various standard forms address the specifications of different types of projects (eg, design and build, public works, engineering works). The choice of structure may vary if international parties are involved, to ensure that all parties are sufficiently represented.

3.2 What are the advantages and disadvantages of these different structures?

The advantage is that the parties can choose between several different types of contracts which address the specifications of their particular project. The disadvantages are that sometimes the terms of these structures may be too rigid or stringent, and may favour one party more than the other.

3.3 What other factors may influence the choice of project structure?

Other factors that may influence the choice of project structure include:

  • whether it is public or private;
  • the source of funding; and
  • the complexity or size of the project.

4 Financing

4.1 How are construction projects typically financed in your jurisdiction? Does this vary depending on whether international parties are involved?

Different financial facilities are available for construction projects in Malaysia, such as::

  • Bridging loan: This is a short-term funding loan for developers which aims to help bridge gaps in cash flow during construction, pending the receipt of sales proceeds from end purchasers and/or end financiers. The proceeds from the end financing will be used to pay off the bridging loan.
  • Syndicated loan: This is a financing facility jointly financed by a consortium of financial institutions to provide financing for large projects.
  • Term loan: This is a commercial loan with a fixed interest rate and a monthly repayment schedule.
  • Overdraft facilities: Deposit funds are available for reborrowing, with interest charged only on the daily overdraft balance.

Of these financial facilities, the bridging loan is the most common in construction projects in Malaysia.

The choice of financing facilities varies depending on the size and complexity of the project and parties involved. If international parties are involved, currency risk should also be considered.

4.2 What are the advantages and disadvantages of these different structures?

The advantages of a bridging loan are as follows:

  • It is a short-term loan.
  • The funds are available whenever required.
  • The process is faster and the developer can obtain funds within a short period of time.

The disadvantages of a bridging loan are as follows:

  • As it is a short-term loan, lenders may charge a higher interest rate.
  • The loan is repaid from the proceeds of the end financing, so if the payment falls through, the borrower may be stuck with a large unexpected sum, which could lead to debt.

The advantages of a syndicated loan are as follows:

  • It allows the borrower to access funds from a diverse group of financial institutions.
  • Borrowing in different currencies can protect the borrower from currency risk which could result from inflation.
  • It allows borrowers to borrow in large amounts.

The disadvantages of a syndicated loan are as follows:

  • As the loan involves various parties, there could be errors due to a lack of communication between the members themselves or between the members and the agent.
  • Due to its structure, which involves multiple lenders, different types of loans and securities may be involved.

The advantages of a term loan are as follows:

  • It has lower interest rates compared to those with shorter terms.
  • The interest rates are fixed and do not vary during the loan period.
  • It is more flexible, as it is negotiable between the borrower and the lender.

The disadvantages of a term loan are as follows:

  • The borrower is obliged to pay the fixed interest.
  • The process may be complicated and take a longer time.

The advantages of an overdraft facility are as follows:

  • The borrower has the flexibility to change the amount borrowed within the limit.
  • Interest is payable only on amounts borrowed.

The disadvantages of an overdraft facility are as follows:

  • The interest rate is high.
  • The financier can change the limit at any time or ask for the funds to be repaid sooner than expected.

4.3 What other factors may influence the choice of financing structure?

  • The size and complexity of the project;
  • The financial capability of the borrower;
  • Future repayment terms;
  • Borrowing requirements;
  • Interest and fee structure;
  • Long-term goals;
  • The financing period; and
  • Market conditions.

4.4 What types of security and other protections are available to lenders to safeguard their position?

  • Bank guarantee: This can be granted by individuals or corporate entities.
  • Security over real estate: The most common forms of security over real estate are charges, statutory liens and assignments.
  • Security over tangible movable property: This includes mortgages and debentures.
  • Cash deposit: This is obtained by charging and assigning the bank accounts which contain the deposit in favour of the lender.

4.5 What law typically governs project finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

  • The Contracts Act 1950 governs the contract entered into between the parties.
  • The Financial Services Act 2013 is they key statute that governs the finance industry.
  • Investment banks which undertake capital market activities are also regulated by the Securities Commission of Malaysia under the Securities Commission Act 1994

5 Bribery and corruption

5.1 What measures are in place to combat bribery and corruption in your jurisdiction?

The Malaysian Anti-Corruption Commission Act (MACC Act) is the main anti-corruption statute in Malaysia. Bribery in the private sector and bribery of public bodies/officials are criminal offences under the MACC Act, punishable by imprisonment, fines or both.

The following constitute criminal offences under the MACC Act:

  • soliciting or receiving gratification;
  • offering or giving gratification; and
  • making false claims with the intention of deceiving or abusing one's position or office for gratification.

An individual who is offered, promised or given gratification has a duty to report the offence. Failure to do so amounts to an offence under the MACC Act.

Construction companies should also be particularly aware of the new corporate liability provision under Section 17A of the MACC Act, which came into force on 1 June 2020. Section 17A creates a strict liability offence: a commercial organisation commits an offence if a person associated with it corruptly gives, agrees to give, promises or offers gratification to any person with the intent of obtaining or retaining business or an advantage for the commercial organisation. Directors or key management personnel of the commercial organisation will also be deemed under the law to have committed the offence. The burden falls on such persons to prove that the offence was committed without their consent and that they exercised due diligence to prevent commission of the offence.

It is an absolute defence for a commercial organisation to show that it has adequate procedures in place to prevent persons associated with it from undertaking corrupt activities. The MACC has issued guidelines to assist commercial organisations with the adoption and implementation of anti-corruption policies.

The Construction Industry Development Board has also taken steps to assist in combating bribery and corruption in the construction industry by issuing codes of ethics and providing training in an effort to enhance integrity among players in the industry.

Other statutes which include provisions to combat bribery and corruption include:

  • the Penal Code, for bribery involving public servants;
  • the Whistleblower Protection Act 2010, to encourage and facilitate disclosures to enforcement agencies of improper conduct and protect the persons making such disclosures from detrimental action; and
  • the Anti-Money Laundering and Anti-Terrorism Financing Act 2001.

6 Standard form contracts

6.1 Which standard form contracts are typically used for construction projects in your jurisdiction? Does this vary depending on whether international parties are involved?

Several standard form contracts are typically used, such as the following:

  • Public Works Department contracts are most commonly used in government and government-linked contracts
  • Pertubuhan Arkitek Malaysia contracts are issued by the Board of Architects Malaysia and are commonly used for private contracts
  • Institute of Engineers Malaysia contracts are commonly used for engineering-related contracts.
  • Construction Industry Board Malaysia contracts are commonly used as templates for contracts with subcontractors and nominated subcontractors
  • International Federation of Consulting Engineers contracts are commonly used for building or engineering works designed by the engineer.
  • Asian International Arbitration Centre contracts are fairly new and are used as a comprehensive unified contract which does not carry the need for the distinction between with and without quantities which can be seen in some of the other standard forms of contract, but is used as a general template to cater to the needs of each party.

6.2 What are the advantages and disadvantages of using the different standard forms?

The advantages of using standard forms are as follows:

  • It reduces the cost and eliminates the need for custom contracts, and the parties can choose the specific standard form which best suits their circumstances/
  • It speeds up the bidding process, at there is less need for negotiations on terms.
  • It standardises contracts within the industry, and industry players are familiar with the standard clauses and the terms they incorporate.

The disadvantages are as follows:

  • It may sometimes favour one party over another.
  • Due to standardisation, the parties may find it more difficult to amend and/or negotiate on certain clauses to better suit their needs.
  • Standard forms also include boilerplate clauses.

6.3 What other factors may influence the decision to use standard form contracts and the choice of standard form?

Other factors that may influence the decision to use standard form of contracts include the following:

  • the type of work involved in the project;
  • whether it is a public or private sector project;
  • the size and value of the project;
  • whether international parties are involved in the project;
  • the complexity of the project; and
  • the complexity and/or flexibility of the clauses in the standard form contract.

6.4 Where standard form contracts are used, do parties typically modify their provisions?

Generally, once the parties have selected a particular standard form contract, its provisions are seldom modified, save for certain matters such as timelines and/or claims clauses which may be modified and agreed between the parties.

7 Contractual issues

7.1 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application?

A choice of foreign law or jurisdiction is valid and enforceable in Malaysia. However, if this choice has public policy implications or in some way infringes natural justice, it may be invalidated and rendered unenforceable. That said, the provisions of local law, such as the law governing the construction of the projects and the Construction Industry Payment and Adjudication Act (CIPAA), will still apply.

7.2 What formal, substantive and procedural requirements typically apply to construction contracts in your jurisdiction? Are there any mandatory terms? What terms are typically included? Are any terms prohibited?

Generally, construction contracts must contain standard contractual elements, such as offer, acceptance, consideration and the intention to create legal relations. Typically, terms relating to the timeline of works, mode of payments, warranties, pricing, notices, default and/or termination, remedies and dispute resolution clauses will also be included. A description of the project and the works to be done pursuant to the obligations of the parties will further be included. It is important to have all vital terms between the parties set out in writing, to avoid any default term being implied by law. Furthermore, pursuant to Section 30 of the Contracts Act 1950, an agreement whose meaning is uncertain or is incapable of being made certain is void. Pursuant to the enactment of CIPAA, pay when paid terms are now expressly prohibited.

7.3 How is risk typically allocated between the parties? What steps can the parties take to mitigate these risks?

Risk allocation in construction contracts is heavily dependent on the wording of the contracts and the type of works involved. For example, in the case of a fixed-sum contract, the contractor may have to assume the risk of the costs exceeding the fixed fee, which may then reduce its profits or even cause a loss. Most commonly, however, the risks will be split between the parties. The parties can mitigate the risks by catering for certain eventualities through an agreement on risk sharing and allocation or through negotiations and variations to the contract to address risks that may arise.

7.4 How can liability be excluded or restricted in your jurisdiction? Are parties able to cap their liability?

Exclusion and/or limitation of liability clauses are often expressly incorporated into the contract between the parties. The Malaysian courts generally approach these clauses strictly in order to give effect to the clear intention of the parties. However, the courts may not agree to uphold a clause which is so widely construed as to defeat the intention and purpose of the contract itself.

7.5 In the event of delay to the project, what consequences will this typically have for the parties?

Typically, construction contract clauses will include provisions for liquidated ascertained damages in the event of a delay.

Employers also often include a performance bond provision in the contract, which can be called upon if there is a delay by the other party in its performance under the contract.

7.6 Is the concept of force majeure recognised in your jurisdiction? If so, what are the typical implications for the parties?

The concept of force majeure is recognised in Malaysia; however, it must be expressly incorporated into the contract and cannot be implied by law. Typically, by invoking this clause, a party may release itself from performance of its obligations under the contract, depending on how the clause is drafted. A party seeking to invoke this clause must prove that such an event has occurred, beyond its reasonable control, which has affected its ability to comply with its obligations under the contract.

7.7 What scope do the parties typically have to make material variations to the works?

Variations are common occurrences in construction contracts and most of the standard forms of contract include terms on variations. If no provision for variations is made under the contract, the parties will have to agree to any changes to the contract, including to the rates and timeline.

The standard forms of contract, such as those described in question 6, define the scope of variations which are permissible, such as:

  • modification of quantities;
  • modification of designs;
  • removal of part of the works;
  • additions and/or omissions to works; and
  • substitution.

The clauses also often provide corresponding terms as to how each variation will be treated in terms of valuation.

7.8 Are there any particular requirements for completion or taking-over in your jurisdiction?

In the normal course of events, once the works have been completed, a certificate of practical completion will be issued and the project will be handed over by the contractor. The different standard forms of contract have different definitions and guidelines on practical completion. However, it is ultimately at the discretion of the architect or the engineer to certify that the works have been practically or substantially completed (as the case may be, depending on the wording of the contract) and/or to issue the relevant documentation confirming the same. If there are still minor works to be carried out which can be done during the defect liability period, a certificate of practical completion can still be issued to allow for the handover of the project.

7.9 What requirements and restrictions typically apply to the termination of the construction contract in your jurisdiction?

A construction contract may be terminated pursuant to the termination clauses in the contract or pursuant to common law. Such terminations include:

  • mutual termination;
  • termination due to default; and
  • termination for convenience.

Provision will usually be made for a right to terminate of both the employer and the contractor due to default by the other party and/or certain prescribed events. Most construction contracts typically provide for a notice clause, whereby the non-defaulting party will issue a notice to remedy to the defaulting party. Generally, all procedural requirements under the contract and pre-conditions (if any) must be complied with for termination to be valid.

Section 57(2) of the Contracts Act 1950 also provides for the concept of frustration, which results in the contract being terminated automatically in the event of the occurrences as stipulated in the section.

7.10 How are delay or liquidated provisions dealt with in your jurisdictions?

As mentioned in question 7.5, liquidated provisions such as liquidated and ascertained damages (LAD) clauses are more often than not included in construction contracts. However, these clauses are subject to Section 75 of the Contracts Act 1950, which means that the party claiming LAD must prove the actual loss suffered. Normally, a court or arbitral tribunal will assess the damages suffered and decide whether damages can clearly be assessed, or whether actual damage cannot be clearly assessed but there is evidence of some real inherent loss which is not too remote. In the former case, the losses awarded will be a sum based on the actual loss suffered, which may not be the full extent of the LAD clause. In the latter case, an award will be given for a reasonable and fair amount as deemed fit by the court or the arbitral tribunal. However, the Federal Court held in Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunication Sdn Bhd (2019) 2 CLJ 723 that as long as an innocent party can establish that there was a breach of contract, and that the contract contained a clause specifying a sum to be paid upon such breach, the innocent party is entitled to receive a sum not exceeding that stipulated in the contract, irrespective of whether actual loss is proven, as long as the defaulting party cannot prove that the LAD clause is unreasonable.

8 Subcontractors and suppliers

8.1 Are there any particular issues which arise when dealing with subcontracts and/or subcontractors which are different from the issues discussed elsewhere?

One of the main issues that arise when dealing with subcontractors is late payments, which can in turn lead to cash-flow problems for subcontractors and often to a delay in the performance of the obligations and completion of the works.

A further issue is multilayer subcontracting, where subcontractors sublet their work to other subcontractors. This can often affect the project performance. However, the main contracts will often require the prior consent of the main contractor before further subcontracting can take place.

When dealing with several subcontractors, management and communication issues can also arise due to the number of different parties involved in the project and the fact that the employer has no control over subcontractors.

8.2 Are there nominated subcontractors in your jurisdiction?

Nominated subcontractors are commonly used in Malaysia. This is often preferable for the employer, as it can choose the subcontractor and negotiate to achieve the best price and terms, and a reduced procurement period. However, the employer's liability may be greater with regard to nominated subcontractors as opposed to subcontractors appointed by the main contractor.

9 Payment

9.1 Are there any statutory or other requirements which govern how parties are paid?

No express statutory provisions govern how parties are paid. In accordance with the freedom of contract, the parties are at liberty to determine the terms of payment in accordance with the terms of the contract executed by the parties.

9.2 Are ‘pay when paid' clauses valid? In what circumstances?

Under Section 35 of the Construction Industry Payment and Adjudication Act 2012, which came into force in 2014, conditional payments are expressly prohibited. It states that any conditional payment provision in a construction contract in relation to payment under the construction contract is void. Although several contracts still include clauses on conditional payments, under Section 35, these clauses will not be enforceable as it would be void.

9.3 How are retentions typically dealt with?

Most standard forms of contract include provisions on retention sums, under which a percentage of the contract sum will be deducted from the progress claims. These retention sums are typically split into two moieties, with the first released once the certificate of practical completion has been issued and the second upon the issuance of the certificate of making good defects.

In 2019, the Federal Court decided that retention sums under a construction contract do not automatically create a trust over the retention sums in favour of the contractor. As such, in order for the retention sums to be held on trust for the contractor, express provisions must be included in the contract and such moneys must be deposited by the employer into a separate trust account.

10 Health and safety

10.1 What key health and safety requirements apply to construction projects in your jurisdiction?

The legal and industry safety and health standards with which stakeholders must comply are set out in:

  • the Occupational Safety and Health Act 1994 (OSHA);
  • the Factories and Machinery Act (Amendment) 2006;
  • the Petroleum (Safety Measure) Act 1984; and
  • relevant regulations and guidelines developed by the Department of Occupational Safety and Health (DOSH).

An employer has a duty to ensure the safety of its employees as well as members of the public who may be exposed to the risks of the construction activities undertaken by it.

The 2007 Guidelines for Public Safety and Health at Construction Sites issued by DOSH, read together with OSHA, require developers, main contractors, contractors and subcontractors to:

  • have a written general policy on safety and health in the workplace;
  • develop a safety and health manual;
  • have arrangements in place to ensure the safety of employees when using or operating, handling, storing and transporting plant and substances;
  • ensure that all employees are properly informed of occupational hazards and the necessary precautions to be taken to prevent accidents, injuries and health risks, and that employees are properly supervised; and
  • to provide and maintain a working environment that is, so far as is practicable, safe and free from risks to health, and to provide adequate facilities to promote the welfare of employees in the workplace.

10.2 What reporting requirements apply with regard to construction site accidents in your jurisdiction?

Section 32 of OSHA requires an employer to notify the nearest DOSH office of any accident, dangerous occurrence, occupational poisoning or occupational disease which has occurred or is likely to occur in the workplace. Such notifications must be made in accordance with the Occupational Safety and Health (Notification of Accident, Dangerous Occurrence, Occupational Poisoning and Occupational Disease) Regulations 2004 (Notification Regulations) as follows:

  • If it involves a fatality or serious bodily injury which prevents the person from resuming his or her normal occupation for more than four days or a dangerous occurrence, the employer must notify the nearest DOSH office as soon as possible and send a report within seven days;
  • If it involves a bodily injury which prevents the person from resuming his or her normal occupation for more than four days, the employer must send a report to the nearest DOSH office within seven days;
  • If a person suffers or is likely to suffer from an occupational poisoning or occupational disease specified in the Notification Regulations, an employer must send a report to the nearest DOSH office within seven days; and
  • If an employee is involved in an accident arising from or in connection with work resulting in injuries that cause death within one year of the accident, the employer must inform the director general of DOSH of the death in writing as soon as it learns of it.

The employer must record and maintain a register of all accidents and dangerous occurrences which take place, and all occupational poisoning or occupational diseases which have occurred or are likely occur; and must send this record to the director general of DOSH before 31 January of each year.

10.3 What are the potential consequences of breach of these requirements – both for the contractor itself and for directors, managers and employees?

Contravention of the OSHA requirements set out in question 10.1 is an offence that is punishable by a fine not exceeding MYR 50,000, imprisonment for up to two years or both.

Anyone that breaches Section 32 of the OSHA or the Notification Regulations commits an offence and, upon conviction, will be liable to a fine not exceeding MYR 10,000, imprisonment up to one year or both.

10.4 What best practices in relation to health and safety should construction contractors consider adopting in your jurisdiction?

Contractors may consider adopting the Best Practices on Occupational Safety and Health in the Construction Industry 2019, which is available on DOSH's website. These comprise 26 chapters and set out good work practices according to the various activities undertaken during the course of construction, to improve industrial standards on workplace safety and health.

10.5 Which bodies are responsible for enforcement of health and safety obligations?

The main enforcement body is DOSH, which operates under the Ministry of Human Resources.

10.6 What is the general approach in regulating the construction sector from a health and safety perspective?

Occupational safety and health in the construction sector is based on the principle that the parties which create risks are responsible for managing them. This responsibility is shared between all stakeholders in the industry, from project proponents to designers and contractors, with the chief responsibility falling on project proponents.

On 10 July 2019, the Ministry of Human Resources launched the Vision Zero Malaysia campaign, which aims to systematically and strategically reduce workplace accidents and diseases. The campaign operates on the premise that not a single workplace accident is acceptable and recognises that prevention of workplace accidents is a shared responsibility.

11 Environmental and sustainable development issues

11.1 What environmental authorisations are required for construction projects in your jurisdiction? Do these vary depending on the type of project or the location of the site?

If a project is a prescribed activity under the Environmental Quality (Prescribed Activities) (Environmental Impact Assessment) Order 2015, Section 34A of the Environmental Quality Act (EQA) 1974 requires that a mandatory environmental impact assessment (EIA) report be prepared during the project planning stage or in the preparatory phase of the feasibility study and thereafter submitted to the director general of environmental quality (DG). There are two types of EIA: the preliminary EIA and the detailed EIA. The latter is undertaken for projects that will have a significant impact on the environment.

Further, pursuant to Section 70A of the Street, Drainage and Building Act 1974, approval for earthworks from the local authority is required.

11.2 What is the process for obtaining environmental authorisations?

For EIAs, the process is detailed in Environmental Requirements: A Guide for Investors, issued by the Department of Environment (DOE) (11th edition). It involves the following steps:

  • The proposed project concept and siting must be aligned with the development plans, policies and government decisions
  • The project proponent must appoint a qualified person to conduct the EIA. The qualified person must be registered with the DOE under the EIA Consultant Registration Scheme.
  • The EIA report must be submitted to the DG for approval. The EIA report must contain an assessment of the impact that the project will have or is likely to have on the environment and the proposed measures that will be undertaken to prevent, reduce or control the adverse impact on the environment. Twelve copies must be submitted to the DOE state offices and three copies and a soft copy of the executive summary to the DOE headquarters.
  • The DG will reject or grant conditional or unconditional approval of the report.

As regards earthworks, plans and specifications in respect of the earthworks for which permit is sought must be submitted to the relevant local authority together with plans and specifications for the construction of the project pursuant to the Street, Drainage and Building Act 1974.

11.3 What environmental requirements must the contractor observe while the site is operational?

The requirements that a contractor must observe while a site is operational include the following:

  • the Department of Irrigation and Drainage's Urban Stormwater Management Manual for Malaysia, for storm water management;
  • the Environmental Quality (Clean Air) Regulations 2014, for control of air pollutants;
  • Section 70A of the Street, Drainage and Building Act 1974, for the prevention and control of soil erosion;
  • Section 23 of the Environmental Quality Act 1974, for noise levels;
  • Section 29A of the Environmental Quality Act 1974, which prohibits open burning;
  • Section 21 of the Environmental Quality Act 1974 and the Environmental Quality (Sewage) Regulations 2009, for sewage discharges; and
  • Sections 69–71 of the Local Government Act 1976, which prohibit the deposit of waste in waterways and water bodies

11.4 What are the potential consequences of breach of these requirements – both for the contractor and for directors, managers and employees?

  • The relevant parties may face charges brought by the DOE, including penalties such as fines and imprisonment, for primary breaches and non-compliance with remedy notices thereafter.
  • Company directors may be subject to liability as if they committed the breach themselves, unless they can show that the breach was committed without their consent and due diligence was carried out to prevent the commission of the breach.
  • If the project breaches the EIA, the DOE may issue a stop work order.
  • The local authority may revoke the approval plans and specifications under Section 70A(10) of the Street Drainage and Building Act 1964, which will result in cessation of the earthworks.

11.5 What environmental requirements apply to new buildings?

In 2016, the Public Works Department made it mandatory for government building projects worth MYR 50 million and above to apply the Malaysian Carbon Reduction and Environmental Sustainability Tool, which sets out the green building agenda.

The Green Building Index is Malaysia's first comprehensive rating system, which provides a good foundation for the construction of more green buildings. Buildings are examined on six main criteria:

  • energy efficiency;
  • indoor environment quality;
  • sustainable site planning and management;
  • materials and resources used;
  • water use efficiency; and
  • innovation.

In West Malaysia, the Uniform Building Bylaws were amended to promote the use of green technologies in buildings.

In Sabah, the Kota Kinabalu City Hall requires all new building plans to incorporate energy-efficient technology. For example, overall transfer thermal value is now compulsory for all non-residential buildings, while roof insulation is mandatory for all buildings.

11.6 Which bodies are responsible for enforcement of environmental obligations?

The primary environmental enforcement body is the DOE. The DOE is responsible for ensuring compliance with the Environmental Quality Act 1974 and for initiating enforcement proceedings.

Municipal and city councils are also empowered by law to issue compounds for breaches of environmental laws and regulations.

11.7 What is the regulators' general approach in regulating the construction sector from an environmental perspective?

The existing legal framework allows authorities to assess the potential environmental impact of construction activities and the corresponding measures needed to minimise any such impact before issuing development permits. However, as outlined in question 11.3, responsibility for environmental management is dispersed across many different government agencies, and environmental laws and regulations are fragmented and scattered across various laws and subsidiary legislation. This could give rise to problems due to a lack of coordination between these agencies and could inhibit proper oversight of environmental compliance.

11.8 What is the impact of Net Zero in your jurisdiction?

At present, there are no policies or regulations on net zero in Malaysia. However, as a signatory to the Paris Agreement, Malaysia has been actively submitting reports and creating policies or guidelines to comply with its commitments under the Paris Agreement.

12 Insurance

12.1 What types of insurance arrangements - whether compulsory or optional - are typically put in place for construction projects in your jurisdiction?

Typically, the following types of insurance policies are taken out for construction projects, among others:

  • insurance against injury to persons and damage to property by contractors;
  • contractors all risks insurance;
  • comprehensive general liability;
  • insurances for workmen under the Employee's Social Security Scheme; and
  • the Foreign Workers Insurance Scheme.

12.2 If local insurance is required, can local insurers assign reinsurance contracts in your jurisdiction?

Nothing in Malaysian law prohibits local insurers from assigning reinsurance contracts.

Under the Financial Services Act 2013, ‘reinsurance' is defined as insurance cover effected by one insurer with a second insurer on the risks, wholly or partly, that it has accepted. This definition includes any similar arrangement by a branch of the insurer in Malaysia with a branch outside Malaysia (the head office of the insurer being, for this purpose, treated as a branch). However, there are no conditions and/or requirements to be fulfilled in order for a local insurer to assign reinsurance contracts in West Malaysia.

On the other hand, in East Malaysia, ‘reinsurance' is defined under the Labuan Financial Services and Securities Act 2010 as a business through which the reinsurer assumes a portion of risk/liability arising from the original insurance policy of an insured party.

There are several prerequisites to be satisfied for an insurer to carry out reinsurance business:

  • The insurer must maintain a minimum of MYR 10 million or its equivalent in any foreign currency in Labuan;
  • The insurer must establish and maintain an operational office in Labuan;
  • The insurer must appoint a licensed Labuan underwriting manager or a Labuan insurance manager; and
  • The insurer must become a member of an association of Labuan insurers.

12.3 Is it possible to obtain insurance for fitness for purpose design obligations?

There have been some attempts to impose higher ‘fitness of purpose' responsibilities. This is because no insurance is available to contractors to cover ‘fitness for purpose' risks; and even if it were available, it would be prohibitively expensive. Although available professional indemnity policies cover liabilities arising from negligence, they do not apply to contractual claims against works arising from technical shortfalls which are not negligent or erroneous.

12.4 What other forms of insurance feature in construction projects in your jurisdiction?

Some of the other forms of insurance which are taken out in construction projects include the following:

  • professional indemnity insurance;
  • contractor's plant and machinery insurance;
  • project cargo insurance;
  • consequential loss insurance;
  • existing building insurance;
  • product liability insurance;
  • public liability insurance;
  • management liability insurance;
  • latent defects insurance;
  • environmental insurance; and
  • insurance of works, materials and goods.

13 Employment

13.1 What legislation must employers and contractors be aware of when hiring labour?

Statutes to be aware of when hiring of labour include the following:

  • The Employment Act 1955 primarily governs site workers and affords protection to foreign workers;
  • The Employment (Restriction) Act 1968 governs the procurement of foreign workers;
  • The Minimum Wages Order 2020 regulates the minimum wage;
  • The Employees' Minimum Standards of Housing, Accommodations and Amenities Act 1990 prescribes the minimum standards of housing for workers; and
  • The Workman's Compensation Act 1952 provides for compensation and expenses incurred in the treatment and rehabilitation of personal injuries sustained from accidents in the course of employment. This act also provides for instances in which an employer may be liable to pay workers employed by contractors as though they had been immediately employed by the principal employer and the principal employer may be indemnified by the contractor.

14 Tax

14.1 What issues must be considered from a taxation perspective in relation to construction projects in your jurisdiction?

The tax treatment of construction contracts is specifically governed by:

  • the Income Tax Act 1967;
  • the Income Tax (Construction Contracts) Regulations 2007; and
  • Public Ruling 2/2009 issued by the Inland Revenue.

Under Public Ruling 2/2009, several methods can be adopted when it comes to the recognition of income prior to completion of the contract, as follows:

  • Under the ‘percentage of completion' method, revenue is matched with expenses incurred in reaching the stage of completion;
  • Under the ‘cost method', the stage of completion is measured by the proportion of contract costs incurred to date compared with the estimated total contract costs; and
  • A formula can also be used to determine the estimated gross profits, as long as this accords with accounting standards and practices. This formula will also apply to estimated losses from uncompleted contracts.

In addition:

  • retention money which becomes receivable must be included in the gross income of the contractor at the date such progress billings are issued; and
  • liquidated damages are not allowable expenses. Liquidated damages receivable from subcontractors, minus the amount of liquidated damages payable to clients, should be recognised on an accrual basis.

14.2 Are any exemptions or incentives available to encourage construction in your jurisdiction?

Construction materials and services are exempt from sales and service tax. With the introduction of the concept of green buildings, the Malaysian government has also introduced tax incentives to encourage developers to embrace this concept.

14.3 What strategies might parties consider to mitigate their tax liabilities in the construction context?

The parties may consider obtaining Green Building Index certification in accordance with the government's efforts to promote green buildings. They may also avail of the investment tax allowance which, among other things, provides incentives to Malaysian companies to relocate their overseas manufacturing facilities to Malaysia. Associations in the construction industry have been working with the government to lobby for better tax incentives to be offered to the construction industry.

15 Technology

15.1 How is Building Information Management (BIM) dealt with in your jurisdiction? Does the government mandate any particular BIM standards or other requirements?

BIM was introduced by the director of the Public Works Department in 2007. In 2018, BIM is mandated for any public project with a value of at least MYR 100 million. As yet, however, the rates of implementation of BIM in public projects and especially private projects are rather low. This is due to a lack of knowledge, a lack of awareness of the need to move on from traditional methods and the costs of investing in new technologies and the time needed for training personnel.

That said, the government has aimed for an 80% adoption rate of BIM by 2025 through the implementation of Strategic Plan 4.0 (see question 15.3).

15.2 Are smart contracts used in your jurisdiction? Are there any special restrictions or regulations?

Although interest in the adoption and utilisation of technology is increasing, smart contracts are not yet common in Malaysia.

No specific regulations govern smart contracts and thus there is no definition of a ‘smart contract' under Malaysian law. There are also no cases in Malaysia which have addressed the implications of smart contracts.

However, as a smart contract is still a contract, the requirements for regular contracts under the Contracts Act 1950 will apply. The main elements to be fulfilled are:

  • offer;
  • acceptance;
  • consideration; and
  • intention to create a legal relation.

15.3 What developments in digital technology do you see having a major impact on the construction industry?

In November 2020, the Construction Industry Development Board officiated over Construction Week International 2020 and the Association of South East Asian Nations Super 8 Virtual Connect event.

In this regard, a five-year Strategic Plan 4.0 for the period from 2021 to 2025 (CR4.0) has been introduced. CR 4.0 is a process aimed at implementing modern technology in order to promote the digitisation of the construction industry and its supply claim.

CR.4.0 involves four key focus areas:

  • building capacity;
  • excellence research, innovation, commercialisation and entrepreneurship;
  • smart integrated technologies, innovation and infrastructure; and
  • an enhanced business environment.

16 Disputes

16.1 In which forums are construction disputes typically heard in your jurisdiction?

Construction disputes are typically heard either by the Malaysian courts or by arbitral tribunals.

16.2 What issues do such disputes typically involve?

The most common disputes include issues such as the following:

  • non-payment;
  • wrongful or unlawful termination of contracts;
  • preparation of final accounts; and
  • failure to rectify defects.

16.3 How are disputes typically resolved?

The parties will usually attempt to negotiate and/or mediate the dispute before referring it to litigation. Typically, most standard form contracts include an arbitration clause and therefore disputes are referred to arbitration.

Matters that are referred to adjudication under the Construction Industry Payment and Adjudication Act (CIPAA) generally involve non-payment and will be disposed of expediently. Among other things, this reduces the risk of suspension of the works due to cash-flow issues.

16.4 Is the use of alternative dispute resolution common and/or encouraged by legislation or the courts?

Alternative dispute resolution (ADR) is commonly used in the construction industry. With the implementation of CIPAA, non-payment issues are often referred to adjudication and are thus generally resolved expediently.

Alternatively, most contracts include an arbitration clause under which the parties agree to arbitrate their disputes.

The use of ADR is encouraged by the courts. In fact, an arbitration award and/or an adjudication decision will be set aside by the courts only in limited circumstances.

16.5 Is the use of dispute boards common in your jurisdiction?

The use of dispute boards is not common in Malaysia; however, there are provisions for the same under the International Federation of Consulting Engineers Red Book, for example.

16.6 Have there been any recent cases of note?

Recent cases which have had an impact on the construction industry include the following:

  • Jack-in-Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd [2020] 1 CLJ 299, heard together with Ireka Engineering & Construction Sdn Bhd v PWC Corporation Sdn Bhd [2020] 1 CLJ 193: The Federal Court held that CIPAA operates prospectively and not retrospectively, which would have meant that adjudication under CIPAA was available only to construction contracts which were entered into after CIPAA came into force on 15 April 2014. The uncertainty in this regard led to the filing of many applications to set aside adjudication decisions that had been issued in relation to construction contracts that pre-dated CIPAA.
  • Far East Holdings Bhd v Majlis Ugama Islam dan Adat Resam Melayu Pahang [2018] 1 MLJ 1: In this case the Federal Court held that under Section 42 of the Arbitration Act 2005, which allows "any question of law" arising from an arbitration award to be referred to the high court, judicial intervention is warranted only where the award substantially affects the rights of one or more parties. This led to the amendment of the Arbitration Act 2005 in 2018, which repealed Section 42. Thus, parties can no longer refer questions of law to the high court once an arbitration award has been rendered. As such, the only way for a party to set aside an arbitration award is under Section 37 of the Arbitration Act 2005.

17 Trends and predictions

17.1 What has been the impact of the COVID-19 pandemic on construction in your jurisdiction?

The Malaysian construction industry has been hit hard by the COVID-19 pandemic. Construction activities have faced significant disruptions since March 2020, when Malaysia first entered into a nationwide lockdown. In the first month of the lockdown, construction activities halted almost completely, with only urgent and critical construction works allowed to continue.

By April 2020, the government allowed construction sectors to operate with strict safety protocols in place and at 50% capacity. However, the Construction Industry Development Board found that many sites remained non-operational, as contractors grappled with cash-flow problems, labour shortages and supply chain disruptions. In September 2020, the construction industry reportedly suffered a record decline.

At the time of writing, Malaysia is once again in the throes of another nationwide lockdown. The construction sector has come to a complete standstill, with only critical maintenance and repair works and important public infrastructure projects allowed to continue. The government has expedited vaccination programmes for construction workers to facilitate the reopening of the construction industry.

17.2 How would you describe the current construction landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Despite the current challenges, major public infrastructure projects have been given the green light to proceed. This could help the construction sector to rebound when vaccination uptake eventually stems the pandemic.

The government has also rolled out an economy stimulus package to allow for variations of contract prices until the end of 2021, to help industry players cope with the sharp increase in the cost of raw building materials when operational restrictions are lifted. Through the stimulus package, extensions of time for the completion of government projects are allowed for contracts affected by lockdown restrictions. Part II of the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 Act 2020, which was due to expire on 30 June 2021, has been extended to 31 December 2021, providing further relief for parties that were unable to perform their contractual obligations due to lockdown measures.

18 Tips and traps

18.1 What are your top tips for smooth completion of construction projects in your jurisdiction and what potential sticking points would you highlight?

Parties should ensure that they scrutinise all clauses of the standard forms of contract to ensure that they understand them and make any necessary modifications to best fit their circumstances before executing such contracts. Throughout the duration of the contract, parties should ensure that proper documentation is kept of all transactions, progress, variations, correspondence, inspections and other necessary matters involving the project. This will potentially assist in the resolution of any potential disputes that may arise.

Often, disputes that arise are harder to resolve due to a lack of documentation or evidence of matters that transpired during performance of the contract, which causes the parties to take opposing positions. For example, disputes involving variations often occur where variations are orally communicated, because the parties do not realise that failure to clearly address these issues in the contract at an early stage will cause more problems down the line if the parties cannot agree on the value and scope of the variations and this is not specified in the contract.

Co-Author: Tan Hei Zel

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.