Shariah compliant financial remedies for late interim payments for construction works contracts

Abstract

Disputes regarding late interim payment from employers to contractors have persistently been a focal point within the construction industry. It is a concern exacerbated by the impact of COVID-19, which lead the government in taking drastic measures to introduce moratoriums on loans extended by banking institutions in Malaysia. Typically, financial remedy for disputes regarding late interim payment is the award of interest, either through contractual or legal provisions. Nevertheless, the term "interest" does not align favourably with Shariah principles, primarily due to its connection with riba'. Hence, conducting an in-depth study of this issue is essential to ensure that the financial remedy granted for late interim payment in construction works contracts aligns with the Shariah requirements. This study focuses on the compliance of the provisions related to financial remedy for late interim payment from the PAM Contract 2018 and the P.W.D Standard Form of Contract 203A (Rev. 1/2010) with the Shariah. Therefore, in relation to financial remedy for late interim payment for construction works contracts, the objectives of this study are: 1) To identify the conventional principles and practices, 2) To identify related Shariah principles and practices, 3) To assess the compliance or otherwise of the conventional principles and practices with the Shariah, 4) To develop a Shariah compliant framework, and finally, 5) To evaluate and validate the framework. The methodology adopted comprises of analysis of literature reviews from the conventional and Shariah sources, reference to the Al-Quran and Hadiths, content analysis and doctrinal analysis from Malaysian construction legal reports published by CIDB Malaysia, as well as comparative analysis on Guidelines for Late Payment Charges for Islamic Banking Institution in Malaysia 2012 with the provisions of financial remedy for late interim payment from conventional construction contracts. The preliminary findings were validated through semi-structured interviews with experts in construction contracts, construction law, Shariah law, and Islamic finance. Thematic analysis was used to analyse the results of the interviews. The findings indicate that while the principles governing financial remedies for late interim payment in conventional construction works contracts align closely with the Shariah perspectives, they require additional refinements in its practices to achieve harmonisation with Shariah principles. Thus, this study has adopted a systematic process by applying the Islamisation concept of “CARII” – Correct (C), Acknowledge (A), Revitalise (R), Integrate (I), Improvise (I) – approaches to develop the required framework. The framework is structured into three stages: 1) Identification, 2) Assessment and evaluation and 3) Recovery of award. The final framework has harmoniously infused the principles of ta’widh and gharamah, while also acknowledging the concerns for the muta’assir and considerations for time limitations for financial claims, with the conventional principles and practices. The framework serves as a supplement to current construction contracts or as a guide for awarding Shariah compliant financial remedies for late interim payment in aiding the construction stakeholders, whether employers or contractors, to follow Shariah principles in their contracts.