Lifeblood of the Industry?

If payment were received timeously I am sure you would agree that a great number of the disputes which arise in the construction industry would fall away.

The trigger for payment, particularly for those contracts where an independent principal agent is engaged, is the issue of a payment certificate. Thus, Clause 14.6 of the FIDIC 1999 Red Book for Construction provides that:

“…the Engineer shall,…, issue to the Employer an interim payment certificate which shall state the amount which the Engineer fairly determines to he due, with supporting particulars.”

Similarly, Clause 49.4 of GCC 2004 provides that:

“The Engineer shall deliver to the Employer and the Contractor the payment certificate … and the Employer shall pay to the Contractor within 28 days after receipt by the Employer of the payment certificate signed by the Engineer.”

Interim certificates are usually inaccurate

Interim certificates are usually estimates of the value of the work carried out in the previous certification period and need not necessarily be accurate. Indeed, it would be difficult for them to be completely accurate. Why then does the issue of an (probably) inaccurate document entitle a contractor to payment and what does the contractor do if he does not receive payment?

The answer to the first question is relatively simple. The parties have agreed in contract that the certificate of the agent shall create an obligation for the employer to pay. The accuracy or otherwise is generally left to the agent as is indicated by the emphasis of the FIDIC wording above. Under Clause 49.1 of CCC 2004 the Engineer certifies the amount which he (the Engineer) considers to be due to the contractor. Again, the agent’s discretion is expected to be exercised and to be exercised fairly.

If the discretion is exercised unfairly, in favour of the employer, the contractor would be entitled to dispute the certificate through the dispute resolution mechanism but this is not a mechanism which will immediately give rise to additional payment, until such time as either the dispute is resolved or, alternatively, the agent agrees that the certificate has been undervalued and issues an amended certificate or amends the amount in the next interim certificate. Where the certificate is exercised unfairly in favour of the contractor (yes, it sometimes does indeed happen!), the employer is not entitled to refuse to make payment since it is his own agent who has issued the certificate and, providing the agent has acted within his mandate, albeit he may have exercised his discretion incorrectly, he continues to bind the principal (employer). The employer’s recourse in these circumstances is also to dispute the certificate or alternatively he may have a claim directly against the agent but he would have to establish:

That the agent has breached the terms of his mandate; and

That the employer has suffered prejudice by way of damages as a consequence.

No pay – turn to the High Court!

Contractors who are in receipt of an interim payment certificate, which the employer refuses to honour, could follow the dispute resolution process, but more immediate relief may well be available through provisional sentence proceedings in the High Court. The process to be followed is a motion application to the relevant court having jurisdiction, usually where the works are being carried out or alternatively where the contract was signed, in which the evidence is led by way of affidavit and no witnesses are called by either side. The legal issues are then debated by respective advocates who argue the pros and cons of the case. Of cardinal importance to the success of such an action is that the certificate should be a liquid document which means that it is capable of standing on its own and describes, at least, that Party A owes Party B the sum of RX. Minor errors in the document, as in the description of the parties or where the contract provides that the certificate must be signed by the agent but it is not so signed but it is issued under cover of a letter signed by the agent, would be approached pragmatically by the court as is evident from certain of the judgements handed down in these applications. In Fraser & Chalmers South Africa (Pty) Ltd v Tuckers Land Development Corporation (Pty) Ltd 1 977 (2) SA 465 1W) the court made it clear that for a document to qualify as a liquid document it must: “Ex facie its terms, that is having regard to the terms of the document by itself, evidence an acknowledgement of indebtedness by the defendant to the plaintiff. When it is said in the authorities that the document must be sufficient in itself to prove that an amount is due then it is obviously presupposed in that statement that the document in itself must be sufficient to show that the4ebt is due by the defendant to the plaintiff.”.

When is a liquid document, not a liquid document?

It is however by no means certain that a payment certificate wil[ be upheld by the court even if it is a liquid document. In Concor Construction (Cape) (Pty) Ltd v Simon’s Town Municipality 1978(4) SA 414 (CPD) provisional sentence on the engineer’s progress certificate was refused when the certificate was in fact found to be a final certificate. The fact that there was a genuine dispute between the parties as to the final amount owing, and that the contract provided for arbitration in such event, persuaded the court to deny Concor payment of the amount reflected as being due in this “interim” certificate. The court’s reluctance to grant provisional sentence was essentially based upon the fact that the engineer had stepped out of his terms of reference by compromising a dispute between the parties which he had no authority to compromise and therefore no authority to bind the employer for the amount of the compromise by way of the certificate issued. The employer’s engineer, as agent, was accordingly not duly authorised and in consequence the certificate was not a liquid document. Provisional sentence was also refused in the case of Kanderssen (Pty) Ltd v Medical Property Holdings Ltd 1977 (3) SA 445. In this case the court held that, where a counterclaim for an amount of in excess of the contractor’s claim under the certificate was also liquid or, if not liquid, at any rate capable of speedy proof, the employer had shown a strong probability it would succeed in the subsequent arbitration. The court had discretion to refuse provisional sentence where the employer had succeeded in proving, on a balance of probabilities, that his defence would succeed and that the provisional sentence application should accordingly be postponed until the arbitration proceedings were disposed of.

UK judgement favours employer, not so in SA.

In that case the court did not go as far as the House of Lords’ decision in the case of GilbertAsh (Northern) Ltd v Modern Engineering (Bristol) Ltd 1197313 All ER 195 in which the House of Lords stated that an employer was entitled to raise a defence that the work or materials included in the interim certificate were defective and therefore the employer was not liable to pay the relevant part of the certificate or indeed the entire certificate. This position has not been adopted by the South African courts presumably because of the emphasis placed on the role of the agent, engineer/architect, in issuing the interim certificate. Where defective work is certified that would be a breach of the agent’s mandate exposing the principal agent to a claim for damages alternatively it could result in a reduced value of a further interim certificate thus rectifying the situation through the process of the contract. Another instance in which provisional sentence on an interim certificate was refused was Thomas Construction (Pty) Ltd (In Liquidation) v Grafton Furniture Manufacturers (Pty) Ltd, an Appellate Division decision, 1998 (2) SA 546 (A).

In this case two interim certificates were issued to the contractor and the 14 day period for payment matured on November 12 and 18 respectively.

However, on November 8 an application for the contractor’s provisional liquidation was lodged and was granted on November 12 – Also on November 8 written notice was given by the employer to the contractor to proceed with the works with due diligence. The 14-day period within which the contractor was required to comply with this notice expired on November 22. On November 26 the employer purported to terminate the contract by registered notice addressed to the provisional liquidator on the grounds that the contractor had failed to remedy its breach of contract in that lie failed to proceed with the works, It was also recorded that no payments would be made in respect of the amounts certified until the contracts had been completed.

The liquidators elected not to proceed with the contract and claimed that the contractor was entitled to be paid in respect of the work which had been certified prior to the liquidation since there had been an accrued right to receive payment as at the date of liquidation. It must be remembered that the certificates had been issued prior to the application and granting of the liquidation and only the date for payment was interrupted by the liquidation proceedings.

One can well appreciate the contractor’s argument in this regard in that, for the interim certificate to reflect an amount due, it must have carried out a reasonable estimate of the value of the work contained in the interim certificate. Accordingly, so argued the contractor, irrespective of the liquidation, that which had been earned prior to the liquidation, as evidenced by the interim certificate, should be paid. The relevant building contract, however, provided, in Clause 22,3.4, that in the event of the contract being cancelled due to failure to remedy a default or liquidation then, until after completion of the works, no payment shall be made under the contract. The court found that this clause provided the employer with a valid defence to the contractor’s claim based upon the certificates and that to hold otherwise would be:

“Tantamount to conferring upon the certificates an independent and absolute viability and enforceability totally divorced from the contracts under which they had been issued.”

The majority of civil contracts contain similar provisions, e.g. FIDIC Clause 15.4(b), and, although less explicitly, Clause 55.2 of CCC 2004,

Ensure contracts include adjudication provisions

Contractors should insist that their contracts include adjudication provisions in order to avoid the necessity to have recourse to the courts for issues such as those described above. An adjudicator’s decision is immediately binding and, whilst failure to pay against such decision may well necessitate an application to court, I would suggest the end result is likely to be more certain since that which has to be proved for the court to support the application should be less complex than some of the issues described above. Providing an adjudicator has acted within the terms of his mandate, and providing he has answered the question that has been put to him and not stepped outside that question, the parties’ agreement that his decision shall be immediately binding should be upheld by the court.

Chris Binnington is a Director of Binnington Copeland & Associates.

THE CIVIL ENGINEERING CONTRACTOR MARCH 2006