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2025 MarsdenLR 411
COURT OF APPEAL PUTRAJAYA
SPM ENERGY SDN BHD & ANOR – Appellant
Versus
MULTI DISCOVERY SDN BHD – Respondent
[Civil Appeal No: B-02(NCvC)(W)-1669-09-2022]
Conditional payment clauses in construction contracts are void under the Construction Industry Payment and Adjudication Act 2012 when no adjudication proceedings have commenced.
Headnote:(A) Construction Industry Payment and Adjudication Act 2012 - Sections 35(1) and (2)(a) - Validity of conditional payment clauses in construction contracts - The court addressed conflicting High Court decisions regarding the validity of such clauses in court proceedings when no adjudication has commenced. (Paras 1, 27, 33)
(B) Corporate Veil - Piercing the corporate veil - The court examined the conditions under which the corporate veil may be pierced to impose liability on individuals or other companies, emphasizing the necessity of proving actual fraud or unconscionable conduct. (Paras 46, 52)
(C) Breach of Contract - The court found that the plaintiff had breached the contract by demobilizing without notice, which justified the defendant's termination of the contract. (Paras 42, 69)
(D) Assessment of Damages - The court ruled that the assessment of damages for the defendant's loss due to the plaintiff's breach should be conducted, and the plaintiff's claims for outstanding sums were addressed. (Paras 63, 68)
Facts of the case:
The plaintiff, a subcontractor, claimed payment from the first defendant for works performed under a construction contract. The first defendant counterclaimed, alleging the plaintiff's breach of contract due to failure to pay subcontractors and demobilization. The High Court initially ruled in favor of the plaintiff, but the defendants appealed.
Findings of Court:
The Court of Appeal found that the High Court had erred in its judgment, particularly regarding the validity of the conditional payment clause and the piercing of the corporate veil.
Issues: The main issues included the validity of the conditional payment clause under CIPAA, the lawfulness of the termination of the contract by the first defendant, and whether the corporate veil could be pierced to hold the second defendant liable.
Ratio Decidendi: The court concluded that the conditional payment clause was void under CIPAA, the termination was lawful due to the plaintiff's breach, and the corporate veil could not be pierced without proof of fraud.
Result: Appeal allowed; High Court's decision set aside; original action dismissed; counterclaim allowed.
JUDGMENT
A. Introduction
[1] This judgment discusses, among others, the following matters:
(1) whether a conditional payment clause in a construction contract is invalid in court and arbitral proceedings (court/Arbitral Proceedings) pursuant to s 35(1) and (2)(a) of the Construction Industry Payment and Adjudication Act 2012 (CIPAA) when no adjudication proceedings have been commenced under CIPAA (Adjudication Proceedings). There are conflicting High court decisions on this question; and
(2) the legal and perhaps "undesirable" consequences of construction works which had been contracted to one party and the same works were then sub-contracted three times to three different parties.
[2] A draft of this judgment (Draft) had been previously forwarded to Hanipah binti Farikullah FCJ (who heard this appeal in the court of Appeal) and Azahari Kamal bin Ramli JCA. Both my learned sister and brother had expressed their concurrence with the Draft.
B. Background
[3] We shall refer to the parties as they were in the High court.
[4] The plaintiff company (Plaintiff) had filed this suit (This Suit) against the following five defendants (Defendants):
(1) the 1st defendant company (1st Defendant) is a subsidiary of the 2nd defendant company (2nd Defendant);
(2) the 3rd defendant (3rd Defendant):
(a) is a Director of the 1st and 2nd Defendants; and
(b) owns 56% of the shares in the 2nd Defendant;
(3) the 4th defendant (4th Defendant):
(a) is a Director of the 1st and 2nd Defendants;
(b) holds 25% of the shares in the 1st Defendant; and
(c) owns 10% of the shares in the 2nd Defendant; and
(4) the 5th defendant (5th Defendant):
(a) is a Director of the 1st Defendant; and
(b) holds 10% of the shares in the 1st Defendant.
[5] A subsidiary of Petronas, PRPC Utilities and Facilities Sdn Bhd (Employer), awarded to the 2nd Defendant a construction project named "Utilities, Interconnecting, Offsite (UIO) Facilities: Construction and Commissioning (CC) of 33 kV and below Distribution Substation Feeder Cable Laying, Jointing and Termination at Gas Insulated (GIS) (Rapid 1200 Project)" in Pengerang, Johor Darul Takzim (Project).
[6] The 2nd Defendant awarded the Project to the 1st Defendant.
[7] On 12 October 2016:
(1) the 1st Defendant appointed the Plaintiff as a sub-contractor of the Project by way of a "Letter of Award" (LA) dated 12 October 2016 [LA (1st Defendant-Plaintiff)]. The following four provisions in the LA (1st Defendant-Plaintiff) are pertinent:
(a) in cl 4.1(a) [cl 4.1(a)], the Plaintiff agreed to make an advance payment of RM2.5 million to the 1st Defendant, which would be used to secure a performance bond for the purpose of the Project (Plaintiff's Advance Payment);
(b) according to cl 4.2 (cl 4.2), the 1st Defendant had appointed for the Plaintiff, "key PMT" (Project Management Team),"to expedite the planning and execution" of the LA (1st Defendant-Plaintiff) [1st Defendant's Appointment (Plaintiff's Key PMT)];
(c) cl 5 (cl 5) provided that the 1st Defendant "will make payment" to the Plaintiff "based on a back to back arrangement after receiving payment" from the Employer; and
(d) according to cl 7:
(i) the 1st Defendant "reserves the right to terminate" the LA (1st Defendant-Plaintiff) if the Plaintiff "refuses, fails or neglects to comply with" the LA (1st Defendant- Plaintiff); and
(ii) the 1st Defendant "shall not be liable for any cost, loss of profit, expenses, claims and damages whatsoever arising out from" the termination of the LA (1st Defendant- Plaintiff); and
(2) the Plaintiff issued LA [LA (Plaintiff-Tiemura)] which appointed Tiemura Engineering Sdn Bhd (Tiemura) to perform all the works of the Plaintiff under the Project (Works).
[8] The Plaintiff assigned its right to payment under the LA (1st Defendant- Plaintiff) to Tiemura in the Plaintiff's letter dated 13 March 2017 to the 1st Defendant [Plaintiff's Assignment (Tiemura)].
[9] The Plaintiff sent a letter dated 13 February 2018 to the 1st Defendant [Plaintiff's Letter (13 Febr
